Internship Report On

“Constructing an Optimal Portfolio and Efficient Frontier for the

Client at IDLC”

Submitted To:
Faculty of Business Administration
Eastern University, Dhaka

Submitted By:
Jakoan Kobir Riad
BBA Program
ID: 162200017
Major: Finance

Under the supervision of:

Mr. Md. Rizvy Ahmed
Assistant proctor and assistant professor
Faculty of Business Administration
Eastern University, Dhaka

Date of submission: 1st June, 2020

 LETTER OF TRANSMITTAL

June 1st, 2020

Mr. Md. Rizvy Ahmed

Assistant Proctor and Assistant Professor

Faculty of Business Administration
Eastern University, Dhaka
Subject: A letter of transmittal for submission of the internship report

Dear Sir,
Here is the report that I was obliged to prepare as a part of my graduation from Faculty of Business
Administration (Finance), Eastern University. I have completed my internship program in IDLC
Finance Limited as a part of my study. I have tried myself to explain my learning and experience
I have gathered from my internship program briefly in this report. My report is on the topic
“Constructing an Optimal Portfolio and Efficient Frontier for the Client at IDLC” and I have
tried my level best to follow your provided guideline and instructions.

I would like to thank you for giving me the opportunity to write this report and for your support.
Rather, in case of any further clarification or elaboration as to my report, I would welcome the
opportunity to consult with you to explore how my findings could best meet your needs.

Sincerely Yours
Jakoan Kobir Riad
ID: 162200017
Major in finance (BBA)
Faculty of Business Administration
Eastern University, Dhaka

ii
 DECLARATION

I declare that the Internship Report on “Constructing an Optimal Portfolio and Efficient
Frontier for the Client at IDLC”. Embodies the result of my own research works, pursued under
the supervision of Mr. Md. Rizvy Ahmed, Assistant proctor &Assistant Professor of the Faculty
of Business Administration, Eastern University.

I further affirm that the work reported in this report is original and no part or whole of this report
has been submitted to, in any form, any other university or Institution for any degree or any other
purpose.

Jakoan Kobir Riad

ID: 162200017
Major in finance (BBA)
Faculty of Business Administration
Eastern University, Dhaka

iii
 SUPERVISOR’S CERTIFICATE

This is to certify that the “Constructing an Optimal Portfolio and Efficient Frontier for the
Client at IDLC” is the bona fide record at the report is done by Jakoan Kobir Riad, ID No:
162200017, as a partial fulfillment of the requirement of Bachelors of Business Administration
(BBA) degree from the Faculty Of Business Administration, Eastern University.

I wish his success in all his future endeavors.

____________________

Mr. Md. Rizvy Ahmed

Assistant proctor and assistant professor
Faculty of Business Administration
Eastern University, Dhaka

iv
 ACKNOWLEDGEMENT

At first I would like to express my gratefulness to almighty Allah who has given me the opportunity
to go through the total process of internship and to write a report in this regard. I would like to
acknowledge my deepest gratitude to the honorable supervisor Mr.Md.Rizvy Ahmed, Assistant
proctor &Assistant Professor of the Faculty of Business Administration, Eastern University,
Dhaka, who has given me suggestions regarding the writing of the report and to go through the
process, which has become an excellent way of understanding the topic of my internship.
I would like to express my deepest gratitude to Md. Maher Ullah, Manager of Credit
Administration-SME and Md Abdullah, Assistant Manager of Credit Administration-SME, Md
IDLC Finance Limited, Dilkusha Branch and also Khaled Hasan, IDLC Portfolio officer at IDLC
investment for sharing information with me and help me to gain knowledge about such a reputed
organization and also enables me to know how NBFI and portfolio investment work. My sincerest
thanks go to the all others who were involved and helped directly and indirectly in preparing this
report. Although I face some difficulties while preparing this report but I enjoyed each and every
moment of collecting information about IDLC Finance Limited.
Finally, I am grateful to the Faculty of Business Administration, Eastern University, for giving me
the opportunity to work outside for attaining practical knowledge. This report suffers from
shortcomings but I have tried my level best to bring about all the facts in comprehensive manner.
Thanks to all from core of my heart.

v
 EXECUTIVE SUMMARY

IDLC Finance Limited is undoubtedly the number one financial institution in NBFI industry of
Bangladesh by having the best portfolio of the country. Besides financing many organization and
Business IDLC also provide services in the stock market. They have a separate division called
“IDLC Investment”. IDLC investment provide clients with the portfolio advisory service. I will
discuss further about it in my report.
My first objective in this report is to find out the perfect portfolio in the stocks investment for the
individual clients and find the right portfolio considering their risk aversion.
In case of three months internship, I used to work at administration for the first two months and
after that I got transferred in the Investment department. In the administration department I was
working in the clearing department where I used to work with postdated cheque and Un Dated
Cheque. In the investment department I was doing research for the creating optimal portfolio. I
tried to put the information I gathered from the Portfolio advisory sector at IDLC and create a
report on Creating optimal portfolio and efficient frontier.
However, it also gives a clear picture what I have learnt during three months long internship at
IDLC and how I was equally benefited for the organization and for myself. Lastly, with a
recommendation I tried to produce this report as informative as possible with numerous
information I have gathered.

vi
Contents
Letter of Transmittal .................................................................................................................. ii
Declaration................................................................................................................................ iii
Supervisor’s Certificate ............................................................................................................. iv
Acknowledgement ......................................................................................................................v
Executive Summary .................................................................................................................. vi
CHAPTER-1 ...............................................................................................................................1
INTRODUCTION ......................................................................................................................1
1.1 Background of the Study ...............................................................................................2
1.2 Rationale of the Study .......................................................................................................2
1.3 Objectives of the study ......................................................................................................3
Broad Objective: ...............................................................................................................3
Specific Objectives: ...........................................................................................................3
1.4 Scope of the Study .............................................................................................................3
1.5 Limitation of the Study ......................................................................................................3
1.6 Literature Review ..............................................................................................................4
Chapter 2 ....................................................................................................................................8
Methodology of the Study ...........................................................................................................8
2.1 Research Design ................................................................................................................9
2.2 Time frame of Data Collection ........................................................................................ 10
2.3 Type of Research ............................................................................................................. 10
2.4 Sources of Data ............................................................................................................... 10
2.4.1 Type of data & Time Frame of Data ...................................................................... 10
2.5 Criteria for Selecting Company ....................................................................................... 10
2.5.1 Company Overview ................................................................................................ 11
2.6 Analysis Tools ................................................................................................................. 16
2.6.1 Creating optimal portfolio (Without Short sale) ................................................... 17
2.6.2 Plotting the Efficient Frontier ................................................................................ 20
2.6.3 Creating CAL Line ................................................................................................. 20
Chapter 3 RESULTS AND FINDINGS..................................................................................... 21
3.1 Annual expected return of the assets ................................................................................ 22
Calculating return: .......................................................................................................... 22

vii
 Calculating Average return: ........................................................................................... 22
Calculating Annual Return: ............................................................................................ 23
3.2 Variance and Annual Variance of the Assets: .................................................................. 24
Calculating Variance:...................................................................................................... 24
3.3 Calculating variance- Covariance Matrix: ........................................................................ 24
3.4 Equally weighted portfolio: ............................................................................................. 25
Portfolio return: .............................................................................................................. 25
Standard deviation of portfolio:...................................................................................... 26
3.5 Optimal portfolio: ............................................................................................................ 28
3.5.1 Capital Allocation when investor is less risk averse .............................................. 30
3.5.2 Capital Allocation when investor is more risk averse ........................................... 31
3.6 Efficient Frontier ............................................................................................................. 31
Set Minimum Variance Portfolio:................................................................................... 31
Plotting Efficient Frontier:.............................................................................................. 32
Capital allocation Line: ................................................................................................... 36
Efficient frontier and capital allocation table ................................................................. 37
Graph of the Efficient Frontier ....................................................................................... 38
Chapter 4 RECOMMANDATIONS .......................................................................................... 39
4.1 Recommendations ........................................................................................................... 40
4.2 Conclusion ...................................................................................................................... 40
ABBREVIATION AND DEFINITION..................................................................................... 41
Abbreviation: ........................................................................................................................ 42
Definitions: ........................................................................................................................... 43
APPENDIX AND REFERENCE .............................................................................................. 44
Appendix: ............................................................................................................................. 45
Reference: ............................................................................................................................. 47

viii
 CHAPTER-1

INTRODUCTION
 1.1 Background of the Study

The internship program is an integral part of Bachelor of Business Administration (BBA).This

program creates a unique opportunity for the students to apply their theoretical knowledge into

practice and gain valuable real world business experience. During the program, students can also

realize existing business condition apart from having opportunities to solve the problem using

various analytical tools. It has become essential for every finance student to have some idea on the

NBFI and stock exchange. As our educational system predominantly text based, inclusion of

practical orientation program is an exception to the norm. From practical knowledge, we will be

able to know real life situations and start a career with some practical experience. After the

completion of BBA program I was placed in IDLC Finance & Investment for the internship

program under the guidance of my faculty supervisor. The duration of my organizational

attachment is 2 months, starting from 7th February 2020 to 7th April 2020. For successful

completion of BBA program; it requires submitting a report, which would illustrate a basic

reflection of the learning.

1.2 Rationale of the Study

IDLC Finance Limited, formerly known as Industrial Development Leasing Company of

Bangladesh Limited (IDLC),[3] is a multi-product Non-Banking Financial Institution with headquarters

in Dhaka, Bangladesh.[4] It offers financial services in the form of Small and Medium enterprise (SME)

finance products, Supplier and Distributor finance, Corporate finance, Structured finance, retail

finance, Deposits and Treasury products. Other than that it is unique for the other NBFI because it has

a division called “IDLC Investment” which provide the clients with the portfolio supervisory & advisory

services. Luckily I got to work in the both divisions. I find the portfolio advisory service very interesting,

that’s why I think creating an optimal portfolio for the client would be very interesting to do my report.

2
Thus I am doing this report on the topic “Creating optimal portfolio and efficient frontier for the

client at IDLC”.

1.3 Objectives of the study

Broad Objective:
 Create a satisfactory and profitable portfolio for the client.(without Short Sale)

Specific Objectives:
 Create an optimal portfolio using necessary tools.

 Capital allocation according to the risk aversion of the individual clients.

 Create a minimal variance portfolio and make efficient frontier.

1.4 Scope of the Study

The scope of this report is to understand the stock market and the riskiness and profitability of various

securities under a portfolio. Making an efficient portfolio that contains both risky and risk free assets

and also understand the impact of risk aversion on the capital allocation.

1.5 Limitation of the Study

Objective of the practical orientation program is to have practical exposure for the students. My

permanent status is for only two months, which is somehow not sufficient enough to gather

adequate experience of such vast banking business. After working whole day in the office it is very

much difficult to study again the theoretical aspects of banking. Finally, as the banks renovation

activities is going on so the physical working condition was not healthy enough that we thought it

would be. Other limitations-

 Eight weeks of time are not enough for the study.

 The staffs of the branch are some time so busy that they could not help us all time.

 Gathering adequate information is very difficult.

 Recent factors could not possible to enter in the study that may reflect the results.

3
1.6 Literature Review

Portfolio optimization is the process of selecting the best portfolio (asset distribution), out of the

set of all portfolios being considered, according to some objective. The objective typically

maximizes factors such as expected return, and minimizes costs like financial risk. Factors being

considered may range from tangible (such as assets, liabilities, earnings or other fundamentals)

to intangible (such as selective divestment).Modern portfolio theory was introduced in a 1952

essay by Harry Markowitz; see Markowitz model. It assumes that an investor wants to maximize

a portfolio's expected return contingent on any given amount of risk. For portfolios that meet this

criterion, known as efficient portfolios, achieving a higher expected return requires taking on

more risk, so investors are faced with a trade-off between risk and expected return. This risk-

expected return relationship of efficient portfolios is graphically represented by a curve known as

the efficient frontier. All efficient portfolios, each represented by a point on the efficient frontier,

are well-diversified. While ignoring higher moments can lead to significant over-investment in

risky securities, especially when volatility is high, the optimization of portfolios when return

distributions are non-Gaussian is mathematically challenging. Markowitz Portfolio (1952)

postulated that an investor could optimize return and inversely mitigate losses by proportioning

asset classes which in turn adapts the inherent risk of each asset. The principles of MPT assume

that all investors are willing to accept a certain level of risk for the highest possible return. Given

the choice, investors will likely choose the least amount of risk for the greatest level of return.

MPT implies that through diversification, an investor can optimize return and mitigate losses by

taking a calculated level of risk. MPT introduced commonplace terms like 80/20 portfolio (80%

stocks, 20% bonds), 60/40 portfolio (60% stocks, 40% bonds). The Efficient Frontier Markowitz'

work on an individual's investment behavior is important not only when looking at individual

4
investment, but also in the context of a portfolio. The risk of a portfolio takes into account each

investment's risk and return as well as the investment's correlation with the other investments in

the portfolio. A portfolio is considered efficient if it gives the investor a higher expected return

with the same or lower level of risk as compared to another investment. The efficient-market

hypothesis (EMH) is a theory in financial economics that states that asset prices fully reflect all

available information. A direct implication is that it is impossible to "beat the market"

consistently on a risk-adjusted basis since market prices should only react to new information or

changes in discount rates (the latter may be predictable or unpredictable). The EMH was

developed by Professor Fama who argued that stocks always trade at their fair value, making it

impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.

There are three variants of the hypothesis: "weak", "semi-strong", and "strong" form. The weak

form of the EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already

reflect all past publicly available information. The semi-strong form of the EMH claims both that

prices reflect all publicly available information and that prices instantly change to reflect new

public information. The strong form of the EMH additionally claims that prices instantly reflect

even hidden "insider" information. The financial crisis during 2007-09 revealed many problems

of understanding and learning by Fund Management firms about their own business models and

those of their investee companies (especially banks, Holland 2010). In addition, there has been

poor financial performance by many FMs when delivering investment services to investors

(Cuthbertson et al 2006, 2008). Holland (2011) argues that Trustees, FM investors, and investee

companies, all require shared knowledge in the form of a grounded theory of FM to overcome

these problems. Holland, (2006) notes the limits of conventional finance theory in explaining

FMs and their performance. Historic field research by Clarkson (1963), Holland and Doran

5
(1998), Hellman (2000), Holland (2006), revealed an embryonic grounded theory underlying FM

structure and behaviour. However, the results were fragmented and a more coherent explanation

of FM was required. Embryonic grounded theory of fund management does not address

questions concerning the role of knowledge in FM decision context and process, and their joint

role in search for novel information of value in investment decisions. It does not address the

dynamic nature of FM both immediate and longer term.

Table-01: Articles behind developing primary knowledge.

Year Author Concept

2003 S Arbeleche, M A H Portfolio management for

Dempster. pension fund

2010 Ben Jackson Micheni Charles The effects of portfolio

management strategy on

financial performance of

investment companies in

Kenya.

2011 By Leslie E. Christian A New Foundation for

Portfolio Management

2011 By Reza Hamzaee Modern Banking And

Strategic Portfolio

Management

6
2011 Pietro Cunha Dolci Antônio The dimensions of IT

Carlos Gastaud Maçada portfolio management – An

analysis involving managers

in Brazilian companies

2012 Johan Christian Hilstian Active Portfolio management

and portfolio construction-

implementing investment

strategy

2015 Khaira Amalia Fachrudina , The Study of Investment

Hilma Tamiami Fachrudin Portfolio Management and

Sustainability of Property and

Real Estate Companies in

Indonesia Stock Exchange

2016 N. Instefjord Investment management

7
 CHAPTER 2

METHODOLOGY OF THE STUDY

8
2.1 Research Design

The research has been designed in this manner:

Searching for the internship

opportunity

C
Internship at IDLC

C
Selection of the topic

C
Literature Review

C
Development of primary
knowledge

C
Data analysis

Report prepare

Report submission

9
2.2 Time frame of Data Collection

This report has been prepared on the basis of experience gathered during the period of internship

form 01/02/2020 to 07/04/2020. Within this period two divisions were visited namely Credit

Administration & IDLC Investment.

2.3 Type of Research

This is a quantitative research.

2.4 Sources of Data

The report is prepared by using only secondary data. Most of the information used in this report

has been collected from IDLC investment research department & various websites.

2.4.1 Type of data & Time Frame of Data

I have collected all the monthly closed price of companies in DSE for last 10 years so time frame

of the data is 10 years. All data is numerical data and worked done in the Microsoft Excel.

2.5 Criteria for Selecting Company

Before choosing the companies I have analyzed some of the criteria of the companies

 Price/ Earnings ratio

 Blue chip stocks

 DSE 30 Stocks

 Companies that are operating in the industries for more than or equal to 10 years.

I have selected 22 companies from different industries of Bangladesh and all of the companies are

in a very good position in the country. Also all the companies belong to the DSE 30 and also doing

businesses for more than or equal to 10 years.

10
 2.5.1 Company Overview

ACI Limited: In 1973, the UK based multinational pharmaceutical company, ICI plc, established

a subsidiary in Dhaka, known as ICI Bangladesh Manufacturers Limited. In 1992, ICI plc divested

its share to local management, and the company was renamed Advanced Chemical Industries

(ACI) Limited. ACI formulates and markets a comprehensive range of more than 387 products

covering all major therapeutic areas, which come in tablet, capsule, powder, liquid, cream,

ointment, gel ,ophthalmic and injection forms. ACI also markets world-renowned branded

pharmaceutical products like Arimidex, Casodex, Zoladex, Atarax etc. from world-class

multinational companies like ASTRAZENECA, UK and UCB, BELGIUM in Bangladesh

BAT (Bangladesh): BAT Bangladesh is a part of British American Tobacco plc, one of the

world’s most international businesses, with brands sold in more than 200 markets around the

world. We make high quality tobacco products for the diverse preferences of consumers, spanning

the business 'from crop to consumer' and we are committed to embedding the principles of

corporate social responsibility Group wide.

Bangladesh Export Import Company (BEXIMCO):

Bangladesh Export Import Company Limited is the largest company within the BEXIMCO

Group and operates across multiple industry verticals. The company is present in textiles, real

estate & hospitality, marine food & commodities trading, ICT, ceramics and aviation.

The company's largest division is Textiles, which is a fully integrated manufacturer of cotton and

polyester blended garments.

Brac Bank: BRAC Bank is a private commercial bank in Bangladesh focused on Small and

Medium Enterprises. The bank has its head office in Dhaka, Bangladesh. It has 186 branches and

50 agent banking outlets and 448 ATM's as of 31 December 2018.

11
BSRM: The Bangladesh Steel Re-Rolling Mills Ltd., commonly known as BSRM, is a

Bangladeshi steel manufacturing company based in Chittagong. It is the largest construction steel

manufacturer company in Bangladesh.

Beximco Pharma: Beximco Pharmaceuticals Ltd (Beximco Pharma) is a leading manufacturer

and exporter of medicines in Bangladesh. Incorporated in the late 70s, Beximco Pharma began as

a distributor, importing products from global MNCs like Bayer, Germany and Upjohn, USA and

selling them in the local market, which were later manufactured and distributed under licensing

arrangement. Since then, the journey continued, and today, Beximco Pharma is one of the largest

exporters of medicines in Bangladesh, winning National Export Trophy (Gold) a record five times.

Confidence Cement: Confidence Cement Limited is the pioneer cement manufacturing

company in private cement sector in Bangladesh under the Government Industrial policy of

1991. The company was established in May 02, 1991 is a form of public limited company.

Confidence Cement Limited, the flagship company of Confidence Group of Companies is one of

the largest producers of cement in the country. It is also a leading Blue-Chip company in both

Dhaka & Chittagong Stock Exchange and there it is among the top 20 performing companies for

the last 15 years.

City Bank: The City Bank is a Bangladeshi private commercial bank, operating throughout

Bangladesh. It is one of the few banks in Bangladesh with a centralized infrastructure. The present

CEO is GK Tahmid.

Eastern Bank: With a vision to become the bank of choice and to be the most valuable financial

brand in Bangladesh, Eastern Bank Ltd. (EBL) began its journey in 1992. Over the years EBL has

established itself as a leading private commercial bank in the country with undisputed leadership

12
in Corporate Banking and a strong Consumer and SME growth engines. EBL's ambition is to be

the number one financial services provider, creating lasting value for its clientele, shareholder, and

employees and above all for the community it operates in.

GrameenPhone: Grameenphone, widely abbreviated as GP, is the leading telecommunications

service provider in Bangladesh, with more than 74 million subscribers and 46.3% subscriber

market share. It is a joint venture between Telenor and Grameen Telecom Corporation.

IDLC: IDLC Finance Limited, formerly known as Industrial Development Leasing Company of

Bangladesh Limited, is a multi-product Non-Banking Financial Institution with headquarters in

Dhaka, Bangladesh

Lanka Bangla Finance: LankaBangla Finance Limited started its journey long back in 1997 as a

joint-venture financial institution with multinational collaboration having license from Bangladesh

Bank under Financial Institution Act-1993. Now LankaBangla is the country’s leading provider of

integrated financial services including corporate financial services, retail financial services, SME

financial services, stock broking, corporate advisory and wealth management services. Under the

broadest umbrella of products and service offerings, we are the lone financial institution to operate

credit card (MasterCard and VISA) and also provide third party card processing services to

different banks in Bangladesh. LankaBangla is a primary dealer of government securities since

November 2009. Since 2006 LankaBangla has been listed in both DSE & CSE in Bangladesh.

Lafargeholdcime: LafargeHolcim Bangladesh Ltd.(LHBL) is a frontline cement producer in

Bangladesh. Operating for more than a decade, it has made about US$ 500 million investment in

building one fully integrated cement plant and three grinding plants --- the largest foreign direct

investment in the sector. It is a joint venture of LafargeHolcim and Cementos Molins. With state-

13
of-the art technology and well-groomed staff, the company produces world class cement to meet

the growing demand generated by massive infrastructure development programs and improved

socio economic conditions.

Meghna Petroleum : Meghna Petroleum Limited (MPL) was setup on December27,1977 under

Company Act 1913 (later on company Act 1994), as a private limited company with the objectives

of taking over the physical possession of all the fixed assets of the erstwhile Meghna Petroleum

Marketing Company Limited (MPMCL) and Padma Petroleum Limited (PPL) as on March 31,

1978. Meghna Petroleum Marketing Company Limited was created after acquiring the operation

of the then ESSO Eastern Inc. (1962) of America in 1975 and Padma Petroleum Limited was

created in 1972 after acquiring the operation of the then Dawood Petroleum Limited (1968).

National Bank: The National Bank Limited is a private limited bank in Bangladesh. Choudhury

Moshtaq Ahmed is the present Managing Director of the bank

National life Insurance: The era of privatized insurers started in Bangladesh with the

establishment of National Life Insurance Company, the first ever private life insurance company

introduced in the People’s Republic of Bangladesh. It started functioning on 23rd April, 1985 as a

result of sheer perseverance, endeavor and supervision of the founder chairman Mr. Alhaj M.

Haider Chowdhury. The company having 703 crore Premium income in the year 2012 with a hefty

Life fund of 2419 crore happens to be a dominant insurer and is moving fast on a new growth

trajectory surpassing its previous records.

Olympic Industries Limited: Olympic Industries Limited is a Bangladesh-based company, which

is engaged in manufacturing, marketing, distributing and selling of dry cell batteries, biscuits, and

candy and confectionery items and plastic products.

14
Pubali Bank: Pubali Bank is the largest private commercial bank in Bangladesh. It has more

branches than any other private bank in the country. Habibur Rahman is the present chairman of

the bank.

Renata: Renata Limited (formerly Pfizer Limited) is one of the leading and fastest growing

pharmaceutical and animal health product companies in Bangladesh. The company started its

operations in 1972 as Pfizer (Bangladesh) Limited. In 1993, Pfizer transferred the ownership of its

Bangladesh operations to local shareholders and the name of the company was changed to Renata

Limited.

Singer BD: The SINGER saga began in 1851, when Sir Isaac Merritt Singer with US$ 40 in the

borrowed capital began to manufacture and sell a machine to automate and assist in the making of

clothing. This revolutionary product was the first offering from the newly formed I.M. Singer &

Company, which has now evolved into the world leader in the manufacturing and distribution of

sewing related products. The SINGER brand name is now famous around the globe.

Square Pharmaceuticals Ltd: Square Pharmaceuticals Ltd. is a pharmaceutical company in

Bangladesh. It was founded in 1958 by Samson H. Chowdhury along with three of his friends as

a private firm.

Titas: The discovery of a huge gas field on the bank of the Titas River in Bhramanbaria in 1962

created a new horizon for the utilization of natural gas. Being established on November 20, 1964

Titas Gas Transmission and Distribution Company Limited (TGTDCL) has completed 50 years of

its operation. The company began its commercial operation with the commissioning of gas supply

to Siddhirganj Thermal Power Station on April 28, 1968 after construction of 14 inch dia 58 mile

long Titas-Demra gas pipeline by the then East Pakistan Industrial Development Corporation. As

15
a progressive national organization, it has earned the glory of being a trustworthy one for the

people by means of the quality of service delivery.

2.6 Analysis Tools

The construction of optimal portfolios continues to be one of the key areas of present financial

research as it plays a crucial role in the process of the investment. First step in the process of

investment is to construct the optimal portfolio. Markowitz approach and the Sharpe single index

model are the prominent approaches to construct optimal portfolios. The number of inputs and the

computational complexity of quadratic optimization in Markowitz approach are the problems that

require a lot of time and energy. To overcome these problems, Sharpe proposed a model that

requires fewer inputs and computational simplicity. The most important issue is whether the results

of this simplified model are similar to those obtained using Markowitz model. As reported in the

chapter 4, some of the studies that were conducted to compare the optimal portfolios using

Markowitz and Sharpe single index approaches have come to conflicting conclusions. While some

of the studies have concluded that there is difference in the characteristics of the portfolios

constructed using Markowitz and Sharpe models, others have concluded that there is no difference

in the characteristics of the portfolios. This work attempts to construct the optimal portfolios by

applying Markowitz and Sharpe approaches, compare the characteristics of the portfolios

constructed and investigate whether there is any difference between the results of these two

approaches.

Markowitz Mean-Variance Model

The Markowitz mean-variance model attempts to minimize risk for a given level of expected

return, or equivalently maximize portfolio expected return for a given amount of portfolio risk.

16
The Markowitz mean-variance portfolio optimization problem can be formulated in the following

matrix forms:

I have done my research by using Markowitz Mean-variance model for creating portfolios. Those

methods are given bellow:

2.6.1 Creating optimal portfolio (Without Short sale)

The minimum variance frontier is a graph that is a graph of lowest possible variance that can be

attained for any given level of expected return. The global minimum variance portfolio is the

portfolio of risky assets that has the lowest variance of all risky assets portfolios. The efficient

frontier is the range of all investments that are within the minimum variance frontier and are above

(have a higher return than) the global minimum variance portfolio.

Return of the Asset Calculated as,

𝑟(𝑡)−𝑟(𝑡−1)
R= 𝑟(𝑡−1)

The expected return for a portfolio is calculated as:

𝐸 (𝑟𝑝) = ∑ 𝑤𝑖𝐸(𝑟𝑖)
𝑖=1

The variance of two assets (x and y) portfolio is calculated as:

σ2P = w2x σ2x + w2y σ2y + 2 wxwyCov(rxry)

Generalizing the equation to accumulate more than two assets result in as:

17
 𝑛 𝑛

σ2P = ∑ ∑ 𝑤𝑖𝑤𝑗𝐶𝑜𝑣(𝑟𝑖𝑟𝑗)
𝑖=1 𝑗=1

After we past two assets portfolio it is necessary to use matrix multiplication to determine the

optimal assets weighting the portfolio.

The expected return for the portfolio is calculated as,

𝐸 (𝑟𝑖)
E(rp) =WTR = [wi ........ wj] [ ]
𝐸 (𝑟𝑗)

Where:

W is the vector of weights of the individual assets (I through j) in the portfolio.

R is the vector of expected return of the individual assets (I through j) in the portfolio.

The formula in Excel is {=mmult (transpose(W),R) }

When making calculation with arrays in Excel type in the formula, but don not press Enter, Instead

Hold Down (CTRL+Shift) and then press enter. This tells Excel that you are making a calculation

with an array and puts the curly parentheses around the formula.

The variance of the portfolios calculated as,

σ2P = WTS(W)

The standard deviation of the portfolio is calculated as,\

18
 1
𝜎𝑖𝑖 ⋯ 𝜎𝑖𝑗 𝑤𝑖 2
σ2P = √𝑊𝑇𝑆 (𝑊)=[[𝑤𝑖 ⋯ 𝑤𝑗] [ ⋮ ⋱ ⋮ ] [ ⋮ ]]
𝜎𝑗𝑖 ⋯ 𝜎𝑗𝑗 𝑤𝑗

Where,

S is refer to as variance covariance matrix of the covariance between each assets return on the

portfolio. The covariance of an assets return with the return of the same assets (such as σii) is the

variance of asset’s return. The definition of W remain same as above.

The standard deviation of the return of portfolio is calculated as in Excel:

{=sqrt(mmult(mmult(transpose(W),S),W))}]

The Optimal Weights for assets in a portfolio are the ones that maintain the value of the sharp ratio

for the portfolio.

𝐸(𝑟𝑝)−𝑟𝑓
Sp =
𝜎𝑝

Capital Allocation and the separation property:

The optimal mix of the weights for the assets in the risky portfolio is the mix that creates a

portfolio along the efficient frontier that is the tangent with the capital allocation line (CAL) . The

results in the CAL with the largest slope (sharp ratio) and is therefore the optimal risky portfolio.

The separation property says that there are two independent tasks involved with the portfolio

choice property. The first is the determining the optimal risky portfolio. This risky portfolio is the

best regardless of the level of risk aversion of Clients. The second task is the capital allocation

between the risky assets and risk free assets portfolio, which is based on individual client’s risk

aversion and the relative rate pf return for the risky portfolio and risk free assets.

19
 𝐸(𝑟𝑝)−𝑟𝑓
Y*= 𝐴𝜎 2 𝑃

Where Y* is the proportion of the portfolio invested in the risky assets portfolio and A is the

measure of investor’s risk aversion.

2.6.2 Plotting the Efficient Frontier

After you calculate the sharp ratio, you find the minimum variance portfolio using solver in the

excel, then you can guess the points between minimal variance portfolio and optimal portfolio very

easily then you try to finds your weights in that particular expected return. For that you can use

solver to find. Here you have to put an extra constraint. Suppose your expected return for minimum

variance portfolio is 10% and expected return for optimal portfolio is 20%. So you have to find

the weights that in the between of 10% To 20%. Suppose you are trying to find the maximum

value of sharp ratio where all the weights are equal to 1 and another constrain is expected return

is equal to 15%. You have to do it several times after that you will get enough point for your

efficient frontier.

2.6.3 Creating CAL Line

First of all in Bangladesh the risk free rate is 7% , so for no risk , means 0 standard deviation we

can get 7% return . If we consider that we can create CAL line by ;

CAL* = rf + Sharp ratio of optimal portfolio* σ2 of each assets

20
CHAPTER 3 RESULTS AND FINDINGS

21
3.1 Annual expected return of the assets

I have collected the ending price of each month from 2010 to 2020 of the 22 companies. If we
subtract the previous month price from current month price and divide it with current month price
we will get the monthly return of each month. So if we average all the returns we will get the
monthly return for all 22 companies. After that if we multiply with 12 we will get yearly return for
each company. Processes are given below as pictures from the excel sheet:
Calculating return:

Calculating Average return:

22
Calculating Annual Return:

23
So AVERAGE ANNUAL RETURN turns out:

Average annual Returns

40.00%

35.00% 33.53%

30.00%
24.12%
25.00% 22.50%
19.73%
20.00% 18.53%
15.49%
14.10% 14.24%
13.40%
15.00%
10.46%
10.00% 7.91% 8.66% 8.56% 7.57%7.28%
5.24% 6.34% 5.83%
5.09%
5.00%

0.00%
-0.54%
-5.00% -2.53%
-4.44%
-10.00%

3.2 Variance and Annual Variance of the Assets:

After calculating return and annual return I have calculated the variance and annual varience of
the assets.
Calculating Variance:

So by using this formula I can calculate the monthly variance of each assets. To get an annual
variance I have to multiply it by 12.
3.3 Calculating variance- Covariance Matrix:

After that I have calculated the variance –covariance matrix for the 22 assets. You can do It by
two ways in the excel, you can use analysis tools to plot a variance –covariance matrix or you can
plot it by manually. I have done it manually as the returns are in the monthly return, so after
calculate the covariance I had to convert it into yearly by multiplying by 12. To do It Manually
first you have to set a matrix formation of the names of the company. Basically you have to write

24
down the company names both horizontally and vertically to form a matrix. After that you have
to find the covariance for the each cell. Formula: =Covar(x,y)

So, here you can see that I have calculated the covariance of ACI and BEXi. Like that I have also
calculated the whole matrix of Covariance.
Covariance between the similar return is 1. That have I put there from keyboard.
3.4 Equally weighted portfolio:

Portfolio return:
If we create a portfolio where we will include all the 22 assets but no risk free assets, than weights

of the each assets will be 1/22=0.4545. As I am not going to pursue the idea of short sale, so our

sum of weights should be equal to 1. We calculate the return of equally weighted portfolio by this

25
Note that after putting this formula you have to hold CTRl+Shift then press enter. After that

formula will look like this.

So for the equally weighted portfolio our expected return is 10.96%

Standard deviation of portfolio:
I have also calculated the Standard deviation of the portfolio, It means how much risky is the
portfolio. To calculate this I have done:

26
So by putting above formula I calculated the standard deviation of equally weighted portfolio
(Note that here also you have to put Ctrl+Shift before pressing enter) and standard deviation is
31.11%.

27
3.5 Optimal portfolio:

SO for our optimal portfolio again we began with the equal weights for all the asstes and similarly
we calculate the portfolio return and portfolio standard deviation as we have calculated before for
the equally weighted portfolio.
Then I also have calculated the sharp ratio for the portfolio. The formula is (Expected return of
portfolio-Risk free rate)/ Standard deviation of the portfolio. So before using solver our weights,
return, and sharp ratio were these:

So now we have to calculate the solver to find out the optimal portfolio. So in the solver we will
set our objective to maximize sharp ratio, so in the objective we will chose the sell in which shar
ratio is on. We will also choose our changing variables that will be our weights . we will set a
constract that all the weights should be equal to 1 . that means we wre going to invest all our money
and there will be no short sale.

28
So you can see in the picture that I have also that make unconstraint variable non negative as we
will not be participating in short sale.
After analysis the data in the solver we will get out optimal portfolio.

29
So as you can see in the picture after analyzing in the solver out of 22 only 10 companies left in

the portfolio where we get a higher expected return than before which is 24 % at a lower standard

deviation (46%) and also sharp ratio is increased (37%).

3.5.1 Capital Allocation when investor is less risk averse

When we put risk aversion (A) as 5 we will get Y*=64.65% , that means we can allocate out

64.65% of the capital in the optimal risky portfolio and remaining capital will be invested in risk

free assets.

30
 3.5.2 Capital Allocation when investor is more risk averse

When we put risk aversion (A) as 5 we will get Y*=32.32% , that means we can allocate out

32.32% of the capital in the optimal risky portfolio and remaining capital will be invested in risk

free assets.

3.6 Efficient Frontier

Set Minimum Variance Portfolio:

First of all I have set a minimum variance portfolio, for which I also used solver, like as;

Here you can see that my objective in the solver is to minimize the standard deviation by changing
the weights and constraint here also is weights is equal to 1. So by solver we get

31
So you can see that in the minimum variance portfolio our standard deviation is 30%, Expected
portfolio return is 11% and sharp ratio is 14%.
Plotting Efficient Frontier:
So now for creating efficient frontier first of all create a table which look like that has given bellow
and copy and paste the results of minimum variance portfolio and optimal portfolio in the table :

32
So you can see that I have created a table like this in that I have put the results of Minimum variance
portfolio and optimum variance portfolio. I have also created a risk free column in which for 0 risk
we will get a 7% return now if you look closely the cells between minimum variance and optimal
portfolio is blank. First of all we have to assume some things. Our efficient frontier will definitely
form between minimum and optimal portfolio. Bellow that and upper that the portfolio would be
inefficient so we can predict some this so I have assume some expected return that will be in the
efficient frontier which will be given bellow:
As efficient frontier will be lie between 11% and 24% thus we have to plot the point between them
and know their weights.
SO now you can see on the table that I have assumed some expected returns. Like as 0.17, 0.18,
0.20, 0.22. So now according to these expected returns I have to calculate all the values by using
solver. How I done that:

33
Now I have run the solver again, in this I want to maximize the sharp ratio, by changing weights,
constraint is weights is equal to 1. But now I have add another constraint which is expected return
is equal to 0.17. As I have assume that in my table. So I get this after run solver:

34
So now copy and paste this result in the table and do it for the rest of the assumed expected returns.

35
As you can see I have calculated all the values and put those in the table like this.
Now I will form the capital allocation line for the graph, you can see in the table it is blank.
Capital allocation Line:
To form a capital allocation line you have to do this:

So CAL*= risk free rate+ Sharp ratio of the optimal portfolio * Standard deviation. By this
formula we have to form the rest of the capital allocation line where risk free rate and sharp ratio
of the optimal portfolio will be the same but standard deviation will change. SO after this we get
our efficient frontier along with the CAL*.

36
Efficient frontier and capital allocation table

37
 Efficint Frontier & CAL
30%

25%
24%
20% 22%
21%
Expected Returns

18% 24%
20% 19% 22% Effici
20% ent
19%
fronti
15% er
17%

10% CAL
7%
11%
5%

0%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Strandard deviation

Graph of the Efficient Frontier

So in the efficient frontier is the set of optimal portfolios, if you between the minimum variance

portfolio and optimal portfolio our efficient frontier lies. But before and after that those are

inefficient portfolios. Because those portfolios give lower expected return for the higher or equal

standard deviation.

Before we have constructed our optimal portfolio and sharp ratio, now by constructing Efficient

frontier and CAL we can see that CAL intersect at the exact point in the efficient frontier where

our optimal portfolios lies . So our method is absolutely correct and accurate.

38
CHAPTER 4 RECOMMANDATIONS

39
4.1 Recommendations

 I would suggest investors to avoid investing in equally weighted portfolios.

 I would suggest investors to avoid investing in inefficient portfolios.

 I would suggest investors to invest in optimal portfolio.

 I would suggest risk averse investors to invest in minimum variance portfolio.

4.2 Conclusion

Two types of risk adjustment procedure have been considered, those that adjust for the total risk

of the portfolio (the coefficient-of-variance and Sharpe measures) (Optimal portfolio) and those

that are risk averse (Y*). The use of these measures is now considered.

From this method a portfolio advisor can suggest both risk averse and risk takers investors. This

is very helpful for constructing portfolios in the different risk taking investors.

Note, however, the benefits suggested by diversification. By combining portfolios that have

positive excess returns after adjusting for systemic risk, but negative excess returns after adjusting

for total risk, the creation of a portfolio of portfolios that has positive excess returns - even after

adjusting for total risk - may be possible.

40
ABBREVIATION AND DEFINITION

41
Abbreviation:

ACI: Advanced Chemical Industries

BAT: British American Tobacco
BEXI: Bangladesh Export Import Company
Brac: Brac Bank
BSRM: Bangladesh Steel Re-Rolling Mills Ltd
BEXIPHAR: Beximco Pharmaceuticals Limited
ConfiCEM: Confidence Cement Ltd
City Bank: City Bank Limited
Eas Bank: Eastern Bank
GP: Grameen Phone
IDLC: IDLC Finance
LANKA: Lanka Bangla Finance
LargeHold: LafargeHolcim Bangladesh
MeghnaPetro: Meghna Petroleum
NationalB: National Bank LTD
NetLife: Net Life Insurance
OlymInds: Olympic Industries
PubaliB: Pubali Bank
Renata: Renata Bangladesh
Singer: Singer Bangladesh LTD
SqPhrma; Square Pharmaceuticals Ltd.
Titas: Titas Gas
CAL: Capital Allocation Line
Std Dev: Standard Deviation.

42
Definitions:
Expected Return: The expected return on a financial investment is the expected value of its return.
It is a measure of the center of the distribution of the random variable that is the return.
Portfolio: In finance, a portfolio is a collection of investments held by an investment company,
hedge fund, financial institution or individual.
Variance: In probability theory and statistics, variance is the expectation of the squared deviation
of a random variable from its mean. Informally, it measures how far a set of numbers are spread
out from their average value.
Standard Deviation: In statistics, the standard deviation is a measure of the amount of variation
or dispersion of a set of values. A low standard deviation indicates that the values tend to be close
to the mean of the set, while a high standard deviation indicates that the values are spread out over
a wider range.
Efficient Frontier: The efficient frontier is the set of optimal portfolios that offer the highest
expected return for a defined level of risk or the lowest risk for a given level of expected return.
Portfolios that lie below the efficient frontier are sub-optimal because they do not provide enough
return for the level of risk.
Risk Averse: In economics and finance, risk aversion is the behavior of humans, who, when
exposed to uncertainty, attempt to lower that uncertainty. It is the hesitation of a person to agree
to a situation with an unknown payoff rather than another situation with a more predictable payoff
but possibly lower expected payoff.
Capital Allocation: Capital allocation means distributing and investing a company's financial
resources in ways that will increase its efficiency, and maximize its profits. A firm's management
seeks to allocate its capital in ways that will generate as much wealth as possible for its
shareholders.
Sharpe Ratio: In finance, the Sharpe ratio measures the performance of an investment compared
to a risk-free asset, after adjusting for its risk. It is defined as the difference between the returns of
the investment and the risk-free return, divided by the standard deviation of the investment.
Optimal Portfolio: Portfolio optimization is the process of selecting the best portfolio, out of the
set of all portfolios being considered, according to some objective. The objective typically
maximizes factors such as expected return, and minimizes costs like financial risk.
Minimum variance Portfolio: A portfolio of individually risky assets that, when taken together,
result in the lowest possible risk level for the rate of expected return. The investments in a
minimum variance portfolio are individually riskier than the portfolio as a whole.

43
APPENDIX AND REFERENCE

44
Appendix:

45
46
Reference:
 https://www.investing.com/equities/renata-ltd-historical-data
 https://www.investing.com/equities/titas-gas-transmission-distribution
 https://www.investing.com/equities/brac-bank-ltd
 https://dsebd.org/dse30_share.php
 https://www.sciencedirect.com/science/article/abs/pii/0304405X76900040
 https://ideas.repec.org/a/ris/jqmumt/0024.html
 www.idlc.com

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