Co-relation between Dhaka Bank & BATBC

A Project Report For

FIN 542: Investment and Portfolio Management

Presented To: Dr. Sarwar Uddin Ahmad Prepared By: Syed Mahmudul Quader : 1025075 Yusuful Haq: 0310128

Date of Submission: 25th July, 11

Independent University Bangladesh, Chittagong (IUB)

1 Introduction: Over the last 5 years or so, the Dhaka Stock Exchange has consistently outpaced the bourses of our neighboring countries and most of the major international exchanges in terms of return on investment. This paper attempts to identify the relationships between major macroeconomic factors such as GDP growth, inflation rate, remittances, festivals and micro factors such as investors perception of risk and return on investments in the DSE relative to other investment opportunities to the DSE General Index. At the first phase we had very little knowledge on theoretical stock selection process, still we selected the stocks based on the industry stability, low P/E ratio, Return and risk and previous company dividend payout trend of different stocks. Here we have used the co-relation factor for finding relationship between Dhaka B ank and BAT BC. We have observed past 10 years annual return and risk factor and also considering the beta of these two companies, we found that Dhaka Bank and BAT BC is highly negatively co-related.

2 Objective: Our objective of this project is to build our knowledge and ability to make our own investment decision in the stock market and maximize our after tax wealth in the portfolio through trading of our selected stocks. We know that the market return is uncertain but to some extent it is predictable. The gap between forecasted values and actual values always exists. Our objective is to make predictions and choose stocks so that we get a minimum risky portfolio with healthy return.

3. Macro Economics Analysis Top down investing tends to lead to good diversification. We have used this strategy which begins with a look at the overall economic picture and then narrows it down to sectors, industries and companies that are expected to perform well. So at the beginning, we need to consider the fact like macroeconomic factors of our country. Macroeconomic factors showed significant impacts on the share market-Dhaka stock exchange. Because of this, our portfolio has also faced the impact of it. They had a significant influence over the share market directly and indirectly both. Various
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macroeconomic factors as well as political factors caused fluctuations and disturbances also in the market. Macro economic variables such as the countrys economy and country statistics such as national GDP (Gross Domestic Product) growth, inflation, interest rates, trends, trade balances, currency movements, export and import, remittances receipts are used to determine where to invest and in what types of assets. Recession- the economic meltdown throughout the world may be also a considerable factor here .Our portfolio was influenced by these trends and they affected on our investment strategies. Market index is sharply increasing day by day as liquidity in DSE is increasing and there is a low supply but high demand in the market; they are controlling the low profile stocks when it is increasing unexpectedly. So SEC (Security Exchange Commission) is taking various steps to control it or to stop it. Like, they recommending decreasing the amount of loan to invest in a stock. They are imposing restrictions for it and want investment on cash basis. DSE is also halting some of the stocks trading due to it. For example, on 23 rd November, DSE halted trading of 13 shares to control the unusual price hike. The shares were- Sonali Ansh, Tallu Spinning, Miracle industry, United airways etc. DSE revolution has also increased as some IPOs and new stocks are entering at the market. Our countrys capital market showed a robust performance in 2010. Stock prices showed significant upturn during the year. Different monthly average price indexes at Dhaka stock exchange (DSE) was increasing as well as the daily average turnover improved showing some fluctuations in 2010. Our country has been identified to be least affected one although economic meltdown occurs around the world. Its because our banking sector is not that much affected by the global situation and the share market is not related with the international market. However, the economy is facing some major challenges that require identification and remedy through policy measures. Underinvestment over the years has resulted in acute deficiencies, especially in power and gas sector

Remittances receipts during july-october,2010, decreased by 0.90 percent from the previous year which means decrease of foreign currency reserve. It indirectly may affect the share market. Due to power crisis and gas crisis, industrialization became slow, thats why, people are looking for alternative investment in real estate and share trading. So in share market, the prices are increasing as the demand is getting higher than the supply. Bangladesh bank also has increased the reserve ratio recently to squeeze the money supply from market. Although there is no statistical measure of political stability, it is just as important a factor in determining the risks involved in a country. For example when the opposing party called the strike, DSE index went down on 28th and 29th November, influencing more or less all the stocks. Market sentiment is also another variable. During the year, a good number of mutual funds and companies were listed in DSE and investing in mutual funds is less risky. The annual average rate of inflation also increased resulting in increase of the price of food grains. Inflation increase made the money circulation high

Exchange Rate with Dollar

100 80 60 40 20 0 1980 1985 1990 1995 2000 2005 2008 2011 Exchange Rate with Dollar

Inflation Rate
8.00% 6.00% 4.00% 2.00% 0.00% 2003 2004 2005 2006 2007 2008 2009 2010 Inflation Rate

20 15 10 5 0 2005 2006 2007 2008 2009 2010 Deposit Interest Rate Loan

Deposit interest

Saving deposit (SD) Special rate for wage earners, housewives & garments workers Rural areas Urban areas

Rate 7% 6.75 6.50

Special notice deposit (SND) Below 1 crore From 1.00 crore to 25.00 crores From 25 crore to below 50.00 crores 50 crore s to 100 crores 100 crores or above

Rate 4% 4.25% 4.50% 5% 6%

Fixed deposit 1 month to 2 months tenure 3 months tenure 6 months tenure 1 year and above tenure Pension saving scheme

Rate 10.5% 13% 13% 13% 9%

Commercial loan a.Cc (Hypo) b. cc (pledge) c. Sod (RE) d. LTR /LIM

Rate 16% 16% 16% 16%

2. Term loan a. Large and medium scale industries b. Small scale enterprise (secured) c. small scale enterprise (unsecured) working capital loan Large and medium scale industries Small scale enterprise (secured) small scale enterprise (unsecured) 4. Agricultural loan 5. House building loan

Rate 13% 16% 17%

Rate 15% 16% 17%

16% 16%

4.0 Co-Relation Calculation:

Dhaka Bank Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Initial Price
132.50 223.25 424.75 253.00 252.75 879.75 464.25 462.50 680.75 354.80 465.25

Last Price
218.25 414.75 264.00 251.31 850.00 469.00 465.75 695.25 360.50 483.50 760.30

Dividend 35 45 20 35 45 25 30 25 25 25 35

91.13% 105.94% -33.14% 13.17% 254.10% -43.85% 6.79% 55.73% -43.37% 43.64% 70.94% 47.37%

BAT BC Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Initial Price 103.3 107.1 74 93.1 133.4 138.8 92.7 82 140 207.3 432.1 Last Price 107.2 72.7 93.1 133.43 139.6 93.5 84.1 152 201.6 409.4 716.5 Dividend 90 120 110 100 100 30 30 70 240 300 430 Return 90.90% 79.93% 174.46% 150.73% 79.61% -11.02% 23.09% 170.73% 215.43% 242.21% 165.33% 36.79%

Co-relation = -0.20348 Fom the above calculation with the help of Microsoft Excel sheet we have got the value of corelation among these two companies which clearly shows that it is negative and our judgment of selection is perfectly right.

5.0 Portfolio Analysis:

Portfolio A B C D E F G H I J Efficient Frontier: ABC
100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0%

XYZ
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 47.3% 55.1% 62.9% 70.7% 78.6% 86.4% 94.2% 102.0% 109.8% 117.7%

Port Var 0.677464 0.539304 0.429523 0.348119 0.295094 0.270446 0.274175 0.306283 0.366768 0.455631

Exp Ret %
120.0 100.0 80.0 60.0 40.0 20.0 0.0 0.0 4.0 8.012.017.022.027.032.037.042.047.052.057.062.067.072.077.082.087.092.0 1.0 5.0 9.013.018.023.028.033.038.043.048.053.058.063.068.073.078.083.088.093.0 2.0 6.010.015.020.025.030.035.040.045.050.055.060.065.070.075.080.085.090.0 3.0 7.011.016.021.026.031.036.041.046.051.056.061.066.071.076.081.086.091.0 14.019.024.029.034.039.044.049.054.059.064.069.074.079.084.089.094.0

6.0 Security Vs Market Analysis:

Daily 5-Jul 6-Jul 7-Jul 10-Jul 11-Jul 12-Jul 13-Jul 14-Jul 17-Jul 19-Jul 20-Jul Average Daily return Dhaka Bank 0.11% 1.36% -0.22% 1.12% -0.66% 2.23% 2.83% 2.75% -3.51% 0.62% 0.42% 0.64% Market Return Bat Bc 0.62% -0.61% -0.31% 1.09% 0.46% -0.15% -2.91% -2.36% 0.81% -1.28% -0.81% -0.50% 0.67% 1.27% 1.23% 2.08% 0.73% 0.25% 0.75% 0.44% 0.13% 0.09% 0.20% 0.71%

Sharpe Ratio: The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a measure of the excess return (or risk premium) per unit of risk in an investment asset or a trading strategy, named after William Forsyth Sharpe. Since its revision by the original author in 1994, it is defined as:

The Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk taken, the higher the Sharpe ratio number the better. When comparing two assets each with the expected return E[R] against the same benchmark with return Rf, the asset with the higher Sharpe ratio gives more return for the same risk. Investors are often advised to pick investments with high Sharpe ratios. However like any mathematical model it relies on the data being correct. Pyramid schemes with a long duration of operation would typically provide a high Sharpe ratio when derived from reported returns but the inputs are false. When examining the investment 9

performance of assets with smoothing of returns (such as with-profits funds) the Sharpe ratio should be derived from the performance of the underlying assets rather than the fund returns.

Standard Deviation Average Return Risk Free Rate Sharpe Ratio

Dhaka Bank 1.72% 0.64% 0.267% 0.22

Bat BC 1.23% -0.50% 0.267% -0.19

Market Index 0.60% 0.71% 0.267% 0.74

7.0 Expected Return Calculation:

Dhaka bank limited Economic condition Boom Recession Normal Possible Return 50% 60% 30% Probability .3 .3 .4

Expected return (x)= 0.3 x .50+ 0.3x .06+0 .4 x .30 = .288 = 28.8%

BAT BC Economic condition Boom Recession Normal Possible Return 40% 3% 20% Probability .3 .3 .4

Expected return x = (.3) x (.40)+ (.3)x (.03) + (.4) x (.20) = 0.209 = 20.9 %

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8.0 Intrinsic Value Calculation: Dhaka Bank Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Average

Closing Price
218.25 414.75 264.00 251.31 850.00 469.00 465.75 695.25 360.50 483.50 76.30

EPS
62.77 76.50 61.77 50.65 60.57 43.99 45.17 45.48 43.36 45.10 6.31

P/E ratio
3.48 5.42 4.27 4.96 14.03 10.66 10.31 15.29 8.31 10.72 12.09 9.05

EPS Growth Dividend Rate payout ratio 55.76% 21.87% 58.82% -19.25% 32.38% -18.00% 69.10% 19.59% 74.29% -27.37% 56.83% 2.68% 66.42% 0.69% 54.97% -4.66% 57.66% 4.01% 55.43% -86.01% 55.47% 57.92%

Average PE Ratio: 9.05 Growth Rate: 28.88% EPS (2010): 6.31 Dividend Payout Ratio: 0.5485 Expected EPS: 6.31 * ( 1+0.288) = 8.127 Total Dividend= 0.5485 * 8.127 = 4.45 Forecasted Future Price = Expected EPS *Average PE Ratio= 8.127 *9.05=73.54 Future Price = Forecasted Future Price + Total Dividend = 77.99

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Bat BC

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Average

Closing Price 107.2 72.7 93.1 133.43 139.6 93.5 84.1 152 201.6 409.4 716.5

EPS 5.92 14.57 16.52 14.52 11.22 3.88 6.03 13.32 27.81 34.48 47.98

P/E ratio 18.10811 4.989705 5.635593 9.189394 12.44207 24.09794 13.94693 11.41141 7.249191 11.87355 14.93331 12.17065

EPS Growth Dividend Rate payout ratio 152.03% 146.11% 82.36% 13.38% 66.59% -12.11% 68.87% -22.73% 89.13% -65.42% 77.32% 55.41% 49.75% 120.90% 52.55% 108.78% 86.30% 23.98% 87.01% 39.15% 89.62% 81.96%

Average PE Ratio: 12.17 Growth Rate: -20.09% EPS (2010): 47.98 Dividend Payout Ratio: 0.81 Expected EPS: 47.98 * ( 1+0.20) = 57.561 Total Dividend= 0.81 * 57.561 = 46.63 Forecasted Future Price = Expected EPS *Average PE Ratio= 57.561 *12.17= 700.51 Future Price = Forecasted Future Price + Total Dividend = 700.51+ 46.63 = 747.14 From the justification of intrinsic value, there is a relationship between intrinsic value and market value. IF, Intrinsic value > Market Value = Buy Intrinsic Value < Market Value = Sell Intrinsic Value = Market Value = Hold

Intrinsic Value Dhaka Bank BATBC 77.99 747.14

Price on 20th Decission July 47.30 Buy 612 Buy

As we see from the above chart, in both the cases Intrinsic value is greater than the market price. So the intrinsic value calculation method suggests us to buy both the shares.

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9.0 Conclusion:
Initially we started with very little knowledge about investment and gradually we applied theoretical knowledge. We saw that we can earn profits while investing in a secured way by analyzing the stocks properly. It is also possible to maximize the profit using wise judgmental decisions with stock analysis. We hope that in future we will be able to use our knowledge from this report and become successful investors in the stock market

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