Portfoilo constructuion

Page | 1
Report on
Efficient Portfolio Construction
Course Name: Portfolio Management
Course Code: F- 407
Submitted To
Ms. Pallabi Siddiqua
Assistant Professor
Department of Finance
University of Dhaka
Submitted By
Md.Monjurul Ahsan
Roll No: 19-099
Section: A
University of Dhaka
Date of Submission: 20th November, 2016

Page | 2
LETTER OF TRANSMITTAL
20th November, 2016
Ms. Pallabi Siddiqua
Assistant Professor
University 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 Ahsan
ID: 19-099 (Section A)
University of Dhaka.

Page | 3
Acknowledgement
It 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.

Page | 4
Contents
EXECUTIVE 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

Page | 5
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.

Page | 6
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

Page | 7
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.

Page | 8
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.

Page | 9
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.
Efficient Portfolio

Page | 10
Steps followed in determining efficient portfolio
Selection 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 Name
01 IDLC
02 IslamicBank
03 BSRM Steels Limited
04 Fu-Wang Ceramic
05 limdebd
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 | 11
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
 PharmaceuticalIndustry
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 Industry
Cement 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 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
 Fuel and PowerIndustry
Government 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 Sectors
Banking, 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

Page | 12
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.
 Ceramic Industry
Bangladesh 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 Calculation
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…
 Price Data
Month end price data of 10 companies and of 5 years have been used for completing the
report purpose.

Page | 13
Figure: Price Data
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.

Page | 14
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

Page | 16
Preparing the Covariance Matrix
In 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.

Page | 17
Max Theta
Max theta with Short sell
 Minimum risk

Page | 18
Min risk with short sell
 Minrisk .5% return, no short Sell

Page | 19
 Min .5% return, short sell

Page | 20
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

Portfoilo constructuion

More Related Content

What's hot (20)

Similar to Portfoilo constructuion (20)

More from Rifat Ahsan (20)

Recently uploaded (20)

Portfoilo constructuion