Dynamic Asset Allocation

LETTER OF TRANSMITTAL
June 07, 2010 Dr. Mahmood Osman Imam Professor Department of Finance University of Dhaka Subject: Submission of Term paper.

Dear Sir, It is an honor and great pleasure for me to present my term paper on Dynamic Asset Allocation. This report is an outcome of the course Financial Derivatives in MBA program I have undergone. This report gave me an opportunity to apply my theoretical expertise, sharpen my views, ideas, and communication skills, and bridge them with the real world of practical experience, which will be a good head start for my future potential career. I hope you would find the report in appropriate manner. I appreciate your cooperation, supportive thought and kind consideration for formulating an idea and developing the structure of the report. Thanking you and looking forward to receive your cordial approval of my submission.

Yours Sincerely Md. Faisal BBA Roll - 10 - 005, MBA Roll- 10-407 10th Batch, MBA Program University of Dhaka

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ACKNOWLEDGEMENT
T he successful accomplishment of this term paper is the outcome of the contribution and involvement of number of people, especially those who took the time to share their thoughtful guidance and suggestions to improve the report. At the beginning I would like to pay my gratitude to the Almighty for giving me the ability to work hard under pressure. First of all, I would like to thank the Dhaka Stock Exchange authority to give me the opportunity to use all the necessary information. Finally, I have deepest gratitude to my respected course teacher Dr. Mahmood Osman Imam, Professor, Department of Finance, University of Dhaka for continuous support, suggestions and providing me with valuable information that was very much needed for the completion of this report. His extended support and advice, any time discussion helped me more than anybody in this regard.

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Table of Content:
Topic EXECUTIVE SUMMARY Chapter: 01 INTRODUCTION Chapter: 02 Managing Equity Risk Chapter: 03 Dynamic Allocation Strategy Dynamic Allocation Strategy Procedure Insured Portfolio Delta Measurement Chapter: 04 Industry Analysis Sector-wise Turnover Performance Market Capitalization at DSE Sector Wise Price Earning Ratio Chapter: 05 Company Analysis Chapter: 06 Assumptions Chapter: 07 Investment portfolio 100 Percent Equity 50% Equity & 50% Risk-Free Asset Chapter: 08 Dynamic Asset Allocation Interpretation Superiority of Dynamic Asset Allocation Chapter: 09 Findings Recommendation Appendices Page No. iv 01 01 02 - 03

03 - 04

05 05 06

06 - 09 10

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EXECUTIVE SUMMARY
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Dynamic asset allocation is a strategy used by investment products such as hedge funds, mutual funds, credit derivatives, index funds, and other structured investment products to achieve exposure to various investment opportunities and provide 100% principal protection. Assets are dynamically shifted (or allocated) between these two components depending largely on the performance of the underlying investments. In real life investors change their asset allocation as time goes on and new information becomes available. Portfolio insurance is a dynamic trading strategy designed to protect a portfolio from market declines while preserving the opportunity to participate in market advances. In theory investors value wealth at the end of the planning horizon (and along the way) using a specific utility function and maximize expected utility. Fixed-mix strategies are optimal only under certain conditions. In general and in most practical cases the optimal investment strategy is dynamic and reflects real-life behavior. The best-known strategy involves trading in real and /or synthetic options. With the introduction of exchange-traded index put options, it seemed theoretically possible for an investor to use these contracts to insure well-diversified portfolios, especially index funds. For some reasons, most investors prefer not to use the option market for insuring the portfolios. Hence it calls for the dynamic trading strategy replicating the option strategy to insure the portfolio. By portfolio insurance we mean all the policies which aim to protect portfolio, usually share portfolios, against losses. Based upon the assumption the portfolio is constructed to insure the initial investment value against price falling risk. This strategy requires buying more stock when the market is going up and selling off some stock as the market is goes down. The proportions allocated to the underlying risky asset and the risk less asset change every period, so this strategy requires a significant amount of trading. The number of units of the underlying risky asset that must be held long at any given moment will be given by the call options Delta, the reciprocal of how many calls it takes to hedge a unit of the underlying portfolio. The call delta tells us the number of units of the underlying portfolio to hold. Page iv University of Dhaka

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As a final point, it can be said that, dynamic asset allocation strategy is the superior form of portfolio investment in comparison with the static asset allocation strategy.

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