Professional Documents
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0 INTRODUCTION
All over the world the stock market is the most volatile market. In the stock market every second situation changes due to many different reasons. It is the most risky market to invest and therefore to compensate the risk the return of the stock market is the highest. As all investors are risk aversive, they always try to trade-off between risk and return. Investors manage risk at cost-lower expected returns E(R). To manage risk the best way is to have a diversified portfolio of securities. And a proper diversified portfolio can only be achieved when its individual securities have negative correlation between them. The advantage of this negative correlation between stocks is that when one stock performs well in the market another one performs badly. If both the stocks perform in a same trend then price of the will increase or decrease at the same time. If price increases then it is good but if price decreases then the investor will lose everything. At first we selected some A category stocks of Dhaka Stock Exchange (DSE). After that we looked into the past ten years records of those stocks. And finally we selected Bangas from food segment and IFIC Bank Ltd from banking segment. There are a number of reasons behind choosing these two stocks. First of all they have a good negative correlation (-0.278565947) between them. Secondly, the segment they belongs food and banking is highly developed and performing well in a continuous manner. In addition, these two stocks are issuing dividend and bonus share regularly which is a plus point for any investor.
Market: The average return of All Share Price Index for last ten years is 21.58%. Based on our probability assumption if market remain normal (pr 0.5) the E(R) will be 21.58%, if market faces a boom (pr 0.3) the E(R) will be 35% and if market faces a recession (pr 0.2) then the E(R) will be 15%. So based on these probabilities, the E(R) of All Share Price Index is 24.29%
ECONOMIC SITUATION PROBABILITY BANGAS BOOM NORMAL RECESSION E(R) 0.3 0.5 0.2 80% 71.22% 15% 62.61% P0SSIBLE RETURN IFIC 70% 60.10% 10% 53.05%
Market
35% 21.58% 15% 24.29%
3.2 Individual Risk: Bangas: Pri Ki K Ki -K (Ki K)2 (Ki K)2 Pri
Total
=
= 24. 1066%
So from the above calculation we find that the risk or the standard deviation of Bangas is 24.1066. IFIC: Pri Ki K Ki -K (Ki K)2 (Ki K)2 Pri
Total
=
= 21.948%
So from the above calculation we find that the risk or the standard deviation of IFIC is 21.948.
Market:
Pri Ki K Ki -K (Ki K)2 (Ki K)2 Pri
=
= 7.44%
So from the above calculation we find that the risk or the standard deviation of Market is
7.44%
3.3 Expected Portfolio Risk and Return: Through assigning 10 different weights to the two stocks of Bangas and IFIC we tried find the risk and return of those portfolios. The risk and return of the 10 portfolios are given belowPortfolio A B C D E F G H I J BANGAS 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% IFIC 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% Total 1 1 1 1 1 1 1 1 1 1 Exp Ret 62.6% 61.7% 60.7% 59.7% 58.8% 57.8% 56.9% 55.9% 55.0% 54.0% Port Var 2.338907 1.852334 1.429818 1.07136 0.776958 0.546613 0.380325 0.278095 0.239921 0.265804 SD 152.9 136.1 119.6 103.5 88.1 73.9 61.7 52.7 49.0 51.6
Concave Curve
64.0 62.0 60.0 58.0 56.0 54.0 52.0 0.0 50.0 100.0 150.0 200.0 EXP RETURN
Based on the expected return and risk we draw an efficient frontier or concave curve. From the diagram we see portfolio J does not falls under the efficient frontier. Therefore, we eliminated portfolio J from our calculation. Step 2: After this we calculated the return relative to risk for all remaining 9 portfolios to identify the most desirable one in terms of its expected return and the risk associated with this. Portfolio
A B C D E F G H I E(R) 62.6 61.7 60.7 59.7 58.8 57.8 56.9 55.9 55.0 ( ) 152.9 136.1 119.6 103.5 88.1 73.9 61.7 52.7 49.0 RETURN RELATIVE TO RISK 40.94 45.33 50.75 57.68 66.74 78.21 92.22 106.07 112.24
From the table, we can see that portfolio I is giving us best possible return relative to risk. For 100 unit of risk it is giving me 112.24 units of return. So based on the above all analysis finally we select portfolio I for investment where the weight of Bangas is 20% and IFIC is 80%. The expected return for this portfolio is 55.0 % and risk is 49.0%.
Individually Bangas and IFIC is giving me a return of 1.19% and 18.93% respectively. According to portfolio I, with composition of Bangas 10% and IFIC Bank 90% the actual return of the portfolio is calculated below-
After monitoring all share price index from 25th July to 4th August 2010, we studied that the market returns from all share price index is 5.23%. 4.2 Calculation of Individual Beta Bangas: Correlation between Bangas and Market is 0.487844018. So the beta of Bangas is-
= BM. B. M /
= (0.48*24.1066*7.44)/55.35 = 1.55
IFIC: Correlation between IFIC and Market is 0.604486361. So the beta of IFIC is-
BM. B. M /
2 M
= (0.61*21.948*7.44)/55.35 = 1.80
Portfolio I:
SD (%) 49 7.44
Beta ( ) 1.78 1
Sharp Ratio
-0.41 0.03
Treynor Ratio
-1.14 0.23
From the above table we clearly see that our portfolio I is performing much lower than the market bench mark.
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5.0 RECOMMENDATION
From the above portfolio analysis and evaluation it is clear to us that the portfolio we chose which failed to satisfy our expectations. From the market analysis we expected a return of 55.0% but in reality we got a return of only 2.964% which is much lower than our expectations. On the other hand if we consider the Sharp Ratio and Treynor Ratio of the portfolio I again we see it performed much lower than the market benchmark. Therefore, we decided to sell the total portfolio because the returns of individual stocks are 1.19% (Bangas) and 18.93% (IFIC) also much lower than the individual expected return of 61.61 %(Bangas) and 53.05 % (IFIC).
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6.0 CONCLUSION
From the 10 years of Bangas and IFIC we have calculated average return 71.22% and 60.10% respectively. After that we shaped 10 portfolios in terms of different weights. From these 10 portfolio, portfolio I is providing us best return relative to risk. From our analysis actual outcome of Bangas, IFIC and portfolio I was 1.19%, 1893% and 2.964% respectively. We also studied the return from all share price index was 5.25% from 25th July 2010 to 4th August 2010. From view of our analysis the return of portfolio I is much lower than the expected return as well as than the return of market portfolio. And also sharp ratio and treynor ratio of our portfolio I is very poor comparing to the market bench mark. So we reached at a conclusion to sell the portfolio.
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7.0 REFERENCES
Bangladesh Bank. Dhaka Stock Exchange. Debapriya Bhattacharya, Distinguished Fellow, CPD Towfiqul Islam Khan,Senior Research Associate, CPD The Daily Financial Express.
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