A Report

On
Construction of an Efficient Frontier

A Report
On
Construction of an Efficient Frontier
Course Name: Portfolio Management
Course code: F-407

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

Submitted By
Uzzal
ID: 18-066, Section-B
Department of Finance
University of Dhaka.

Date of Submission: January 9, 2016

Letter of Transmittal
January 9, 2016
MD. Sajib Hossain
Assistant Professor,
Department of Finance
University of Dhaka

Subject: Letter regarding Submission of report on Constructing an efficient frontier.

Dear Sir,
With due respect I would like to inform that I have prepared a report on Constructing an
efficient frontier on 20 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

Uzzal
Roll: 18-066, Section: B.
BBA (18th Batch)
Department of Finance
University of Dhaka

Preface
After the successful completion of the course named Portfolio Management (F-407) of the
BBA program, preparation for the business report provide me an opportunity to lessen the gap
between the theoretical knowledge & practical experiences. To enhance the analytical
competence, I was asked to prepare a report on Construction of an Efficient Portfolio
Considering 20 Companies which has undoubtedly put fresh impetus to my understanding and
practical knowledge that permit me in the future to shine in life. Preparing this report is a great
way to collect information from different sources. So the report will be very helpful in my future
career. I believe practical experiences of working with an effort will surely make me better
understanding of my theoretical knowledge in the future business world.

Acknowledgement
First of all I express my gratitude from heart to the Beneficent, the Merciful, & Almighty God
for giving me the strength and patience to prepare this report within the programmed time.
I would also like to thank the kind and very helpful senior brothers for their generous help and
the lab assistants helpful hand.
I am deeply indebted to my course teacher, Md. Sajib Hossain, Assistant Professor, Department
of Finance, University of Dhaka for his cooperation and precious guideline in preparing the
report.

Executive Summary
It is very significant and important for investors to analyze risk-return relationship or
aspects of the investment portfolio whether it is profitable. An investor can take
investment decision only after analyzing all aspects of the investment. Then these
types of decision can give a positive result to portfolio investor. So, it is needless to
say that proper analysis plays essential 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, I tried to evaluate stock of 20 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 20 companies from 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.

Table of Contents
Chapter 01: Introduction............................................................................................ 8
1.1 Origin of the Study............................................................................................ 8
1.2 Objectives of the Study..................................................................................... 8
1.3 Methodology...................................................................................................... 8
1.4 Secondary Data Collection................................................................................8
1.5 Limitations......................................................................................................... 8
Chapter 02: Economy and Market Overview..............................................................9
2.1 Economy Analysis.............................................................................................. 9
2.2 Industry Analysis............................................................................................... 9
2.2.1 Textile Industry:........................................................................................... 9
2.2.2 Pharmaceutical Industry.............................................................................. 9
2.2.3 Banking, NBFI & Investment Sectors:..........................................................9
2.2.5 Food & Allied Products:............................................................................. 10
2.3 Stock Market Overview....................................................................................10
Chapter 03: Construction of Efficient Frontier...........................................................11
3.1 criteria for Assets Selection............................................................................. 11
3.2 Analysis & Interpretation................................................................................. 11
3.3 Companies Choosed........................................................................................ 11
3.4 Equal Weight Portfolio..................................................................................... 12
3.5 Short Sale Allowed and Risk Free Borrowing Lending Allowed.........................13
3.6 Short Sale Not Allowed and Risk Free Borrowing Lending Allowed..................14
3.7 Short Sale Allowed and Risk Free Borrowing Lending Not Allowed..................16
3.8 Short Sale Not Allowed and Risk Free Borrowing Lending Not Allowed............18
Chapter 04: Conclusion............................................................................................ 20

Chapter 01: Introduction

1.1 Origin of the Study
This report is prepared for Md. Sajib Hossain, Assistant Professor, and Department of finance,
University of Dhaka, Course teacher of Portfolio Management (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.

1.2 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.

1.3 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.

1.4 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.

1.5 Limitations
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.

Chapter 02: Economy and Market Overview

2.1 Economy Analysis
It has been observed that economy of Bangladesh is very unstable and it has been the subject of
threats by many different important issues. Most important issues are Unemployment, Inflation,
Power and gas crisis, Political issues etc. In spite of these problems, our economy is a growing
one. The Government of Bangladesh has a plan to develop this country which is known as
Vision 2021. In accordance with this plan within 2021, Bangladesh will be a country of
medium income. For the achievement of this plan, government gives emphasis on Power sector,
RMG sector and infrastructure sector and the project of Digital Bangladesh also gives emphasis
on power and IT sectors. Without a sound, well developed, and efficient capital market
development is impossible. Government always tries its level best to keep this market stable and
has taken some major initiatives to develop it and make it more efficient. The economic and
political condition is the prerequisite of the economic growth and development and unfortunately
it has no existence in our country. Though the government has not changed during the time frame
chosen by me but the economic condition is not as good as it should be.

2.2 Industry Analysis

2.2.1 Textile Industry: Our textile industry has high potentiality. We know that Bangladesh
earns the largest portion of foreign currency from RMG and recently this potentiality has been
decreased due to some occurrences in Bangladesh. 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 by minimizing cost. As a result, the demand for Bangladeshi textile based
low priced cloths is increasing worldwide though it is facing some ethical issues after the
accidents in garments sectors. 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.
2.2.2 Pharmaceutical Industry: The growth of Pharmaceutical industry is mentionable in our country
and 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.

2.2.3 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 and the competition among the existing companies is very high. In these sectors the
bargaining power of the buyers and suppliers is very high. Causing the sector and economy more
efficient but on the other hand there arise a long run risk of falling the economy.

2.2.4 Engineering: This sector is very emerging for our economy and 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 as our country is a growing one. 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.
2.2.5 Food & Allied Products: This sector is very emerging for our country and 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 and 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.

2.3 Stock Market Overview

The financial sector is a vital part of an economy because of the role it plays in intermediating
savings of the private and public sector to productive activities including investment and
financial system is dominated by the banking sector, which fundamentally depends on short- and
medium-term deposits for financing their lending portfolios. This limits availability of funds that
would be required for long-term investments like infrastructure and housing and Bangladesh has
a capital market, with its known difficulties, and there is no vibrant secondary market for bonds,
which limits the availability of resources for infrastructure financing. From 2010 to 2014 the
stock market of Bangladesh is very unstable. In 2010 the market crashed because of the market
irregulation and illiterate investors. The market is little bit better now but the volatility of return
for maximum companies is still high.

Chapter 03: Construction of Efficient Frontier

3.1 criteria for Assets Selection
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 market capitalization of these companies is more than Tk. 2000 million.
2. The companies are listed in Dhaka Stock Exchange.
3. All the companies are A category company.
4. The Net Asset Value (NAV) of the selected companies is more than Tk. 15.
5. The maturity of these companies is more than 5 years.

3.2 Analysis & Interpretation

I have made some assumptions for the analysis purpose. These are:
1. The record date of the dividend is assumed to be in the following month of dividend
declaration.
2. Splited shares are multiplied by 10 to make equivalent with previous months price.

3.3 Companies Choosed

The followings are the companies that has been selected for the portfolio construction.

Companies Selected
Dhaka Bank

EBL Mu

One Bank

Meghna Cement

BRAC Bank

Golden Son

Mercantile Bank

Apex Food

EXIM Bank

Fu Wang Food

Southeast Bank

BATBC

Islami Bank

Titas Gas

Meghna Life

Apex Tanary

Janata Insu

Bata Shoe

IDLC

GP

3.4 Equal Weight Portfolio

Companies

Monthly
Average
Return

Dhaka Bank
One Bank
BRAC Bank
Mercantile Bank

0.65%
0.72%
-0.17%
20.00%

EXIM Bank

55.67%

Southeast Bank
Islami Bank
Meghna Life
Janata Insu
IDLC
EBL Mu
Meghna Cement
Golden Son
Apex Food
Fu Wang Food
BATBC
Titas Gas
Apex Tanary
Bata Shoe
GP
Total Portfolio
Weight
Portfolio Return
Variance
Standard
Deviation
Sharpe Ratio

1.09%
0.45%
1.44%
0.06%
1.14%
5.44%
1.96%
2.05%
0.71%
1.64%
3.61%
1.21%
1.15%
1.97%
3.75%

Monthly Annualized
Total
Return
Risk
(STD)
10.67%
22.20%
16.12%
151.09
%
274.41
%
14.33%
11.46%
17.83%
19.32%
15.75%
36.57%
21.59%
16.32%
16.07%
19.39%
9.46%
11.09%
14.47%
10.43%
29.14%

Annualized
Total Risk

Weight

7.78%
8.59%
-2.00%
240.03%

36.96%
76.90%
55.83%
523.38%

0.05
0.05
0.05
0.05

667.99%

950.57%

0.05

13.04%
5.39%
17.27%
0.71%
13.69%
65.25%
23.56%
24.61%
8.48%
19.73%
43.34%
14.58%
13.81%
23.69%
45.03%

49.64%
39.69%
61.75%
66.92%
54.56%
126.68%
74.81%
56.53%
55.65%
67.17%
32.78%
38.41%
50.13%
36.13%
100.93%

0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05

1.00
15.32%
6.26%
25.03%
58.04%

RFR(10 year
bond)
Monthly RFR

9.50%
0.79%

In an equal weighted portfolio the return is 15.32% per month and the risk is 25.03%. The theta
is very low. In every case the risk free rate is 9.5% which is of 10 year bond because this rate
predicts the future economic condition.

3.5 Short Sale Allowed and Risk Free Borrowing Lending Allowed
The following is the weight of every company when short sale is allowed.

Company Name

Weight

Dhaka Bank
One Bank
BRAC Bank
Mercantile Bank
EXIM Bank
Southeast Bank
Islami Bank
Meghna Life
Janata Insu
IDLC
EBL Mu
Meghna Cement
Golden Son
Apex Food
Fu Wang Food
BATBC
Titas Gas
Apex Tanary
Bata Shoe
GP
Total

9.70%
32.60%
-56.61%
6.05%
3.52%
-14.11%
-63.41%
58.97%
-28.54%
2.74%
34.57%
33.24%
-6.11%
-11.89%
17.75%
344.05%
-16.23%
-126.68%
-136.84%
17.22%
1.00

Portfolio Return
Variance
Standard Deviation
Sharpe Ratio
RFR(10 year bond)
Monthly RFR

15.32%
6.26%
25.03%
58.04%
9.50%
0.79%

The efficient frontier of this situation is depicted below.

Short sale & Risk Free rate

Portfolio Return

25%
20%
15%
10%
5%
0%
24% 26% 28% 30% 32% 34% 36% 38% 40%

Portfolio Risk

3.6 Short Sale Not Allowed and Risk Free Borrowing Lending Allowed
When short sale is not allowed the situation of the weight of companies become as follows.

Company Name

Weight

Dhaka Bank
One Bank
BRAC Bank
Mercantile Bank
EXIM Bank
Southeast Bank
Islami Bank
Meghna Life
Janata Insu
IDLC
EBL Mu
Meghna Cement
Golden Son
Apex Food
Fu Wang Food
BATBC
Titas Gas
Apex Tanary

0
0
0
0.024293719
0.018341498
0
0
0
0
0.025134821
0.098537424
0
0
0
0
0.777573151
0
0

Bata Shoe
GP
Total
Portfolio Return

0
0.056119388
1.00
5.09%

Variance
Standard Deviation
Sharpe Ratio
RFR(10 year bond)
Monthly RFR

1.01%
10.06%
42.74%
9.5%
.79%

The following is the efficient frontier of the situation.

no short sale & risk free rate

8%
7%
6%
5%

Portfolio Return

4%
3%
2%
1%
0%
10% 10% 11% 11% 12% 12% 13% 13% 14%

Portfolio Risk

3.7 Short Sale Allowed and Risk Free Borrowing Lending Not Allowed
In this situation there is no option to borrow or lend at risk free rate. And the condition remains
the same of the first situation.
The following is the weight of every company when short sale is allowed.

Company Name

Weight

Dhaka Bank
One Bank
BRAC Bank
Mercantile Bank
EXIM Bank
Southeast Bank
Islami Bank
Meghna Life
Janata Insu
IDLC

9.7%
32.6%
-56.6%
6.1%
3.5%
-14.1%
-63.4%
59.0%
-28.5%
2.7%

EBL Mu
Meghna Cement
Golden Son
Apex Food
Fu Wang Food
BATBC
Titas Gas
Apex Tanary
Bata Shoe
GP
Total

34.6%
33.2%
-6.1%
-11.9%
17.8%
344.0%
-16.2%
-126.7%
-136.8%
17.2%
1.00

Portfolio Return
Variance
Standard Deviation
Sharpe Ratio
RFR(10 year bond)
Monthly RFR

15.32%
6.26%
25.03%
58.04%
9.50%
0.79%

The efficient frontier of this situation is depicted below.

Short sale but no risk free rate

25%
20%
15%

Portfolio Return

Portfolio Return

10%
5%
0%
20%

25%

30%

35%

40%

Portfolio Risk

3.8 Short Sale Not Allowed and Risk Free Borrowing Lending Not Allowed
In this condition the weight of the companies would be as following.

Company Name

Weight

Dhaka Bank
One Bank
BRAC Bank
Mercantile Bank
EXIM Bank
Southeast Bank
Islami Bank
Meghna Life
Janata Insu
IDLC
EBL Mu
Meghna Cement
Golden Son
Apex Food
Fu Wang Food
BATBC
Titas Gas
Apex Tanary
Bata Shoe
GP
Total
Portfolio Return
Variance
Standard Deviation
Sharpe Ratio
RFR(10 year bond)
Monthly RFR

29.40%
0.00%
2.36%
0.08%
0.00%
0.00%
20.11%
0.00%
0.00%
5.26%
1.93%
0.00%
0.00%
0.00%
0.00%
33.99%
0.00%
0.00%
3.82%
3.05%
100.00%
1.88%
0.37%
6.09%
17.79%
9.50%
0.79%

The following is the efficient frontier of the situation.

Portfolio Return
6%
4%

Portfolio Return

2%
0%
5%

6%

7%

8%

9%

10%

Portfolio Risk

11%

12%

Chapter 04: 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 2010 to 2014 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.