20 Securities Selection and Portfolio Construction

and Evaluation

Prepared for:

Md. Sajib Hossain

Assistant Professor
Department of Finance
Faculty of Business Studies
University of Dhaka

Prepared by:

Shaikh Saifullah Khalid

Section: B
ID No: 23-160
Department of Finance
University of Dhaka

February 2, 2021

1
Letter of Transmittal

February 2, 2020

Md. Sajib Hossain

Assistant Professor,
Department of Finance
Faculty of Business Studies
University of Dhaka

Subject: Submission of report

Dear Sir,

I consider myself very fortunate to prepare this report under your valuable guidance. Working for
this report was both a challenge and pleasure to us. We are indebted to you.
Your suggestion of the topic of my report “20 Securities Selection and Portfolio Construction” was
very appropriate. Your constant guidance helped me to apply our theoretical acquired in the
classroom to the practical world.
Thank you for giving this kind of challenging task.

Sincerely yours

………………….
Shaikh Saifullah Khalid
Id No: 23-160

2
Contents
Executive Summary ................................................................................................................... 4
Chapter 1: Introduction............................................................................................................... 5
Objectives of the Study........................................................................................................... 5
Data Collection and Methodology ........................................................................................... 5
Limitations of the Study .......................................................................................................... 5
Chapter 2: Theoretical Background ............................................................................................ 5
Portfolio Risk .......................................................................................................................... 5
Portfolio Return ...................................................................................................................... 5
Efficient Portfolio .................................................................................................................... 6
Covariance Matrix .................................................................................................................. 6
Chapter 3: Stock Selection Criteria ............................................................................................ 6
Justifications for Picking Industry and Company ..................................................................... 7
Chapter 4: Converting Average Total Return to Expected Return .............................................. 9
Chapter 5: Constructing Efficient Portfolio .................................................................................10
Factors of Considerations ......................................................................................................10
Scenario 1: Shorts Sales Allowed Along with Risk-free Borrowing Lending ...........................10
Scenario 2: Shorts Sale Not Allowed and Risk-free Borrowing Lending Allowed ...................12
Scenario 3: Shorts Sale Allowed and Risk-free Borrowing Lending Not Allowed ...................13
Scenario 4: Shorts Sale Not Allowed and Risk-free Borrowing Lending Not Allowed .............15
Chapter 6: Portfolio Performance Evaluation ............................................................................16
Sharpe Ratio: ........................................................................................................................16
Treynor Ratio:........................................................................................................................17
Jensen Alpha Ratio: ..............................................................................................................17
Information Ratio: ..................................................................................................................17
M Squared Ratio: ..................................................................................................................17
Chapter 7: Portfolio Performance Attribution .............................................................................18
Scenario 1: Short Sale with and Riskless Borrowing Lending ................................................18
Chapter 8: Conclusion...............................................................................................................19
Works Cited ..............................................................................................................................20
Appendix A: Excess Return Calculation ....................................................................................21
Appendix B: Performance Evaluation Ratios .............................................................................21

3
 Executive Summary
The main goal of this report is to find the efficient portfolio with a portfolio of 20 listed securities
from Dhaka Stock Exchange. The volatility of return can be reduced by proper fundamental
analysis and stock diversification. In this report, I tried to construct efficient portfolio based on
different risk return scenarios. I have chosen 20 companies for investment purpose based on
different indicators.
As it is a portfolio construction report, I skipped thorough fundamental analysis. I picked my
companies based on P/E, dividend yield, ROE, market cap. After that, I simulated 4 cases. In the
first case of short sales along with riskless borrowing lending, I have found that the optimum
portfolio return of my portfolio is 6.27% with a standard deviation of 6.52%. On the second
scenario of “No short sales with riskless borrowing-lending”, my portfolio return is 2.88% and risk
is 3.85%. In addition to that, our equal weighted portfolio produced 2.22% return along with 5.41%
risk. Whereas, our equal weighted portfolio has a Sharpe ratio of 0.3213.

4
 Chapter 1: Introduction
This term-paper is prepared as a course requirement of F-407: Portfolio Management under the
direct guidance of Md. Sajib Hossain, CFA, ACCA, Assistant Professor, Department of Finance,
University of Dhaka. In this report, I have tried to cover the theoretical and practical aspects of
portfolio construction process.

Objectives of the Study

• Developing efficient frontier using Microsoft Excel and Solver
• To give an insight of stock market trading
• Optimizing portfolio risk and return
• To know the task of a portfolio manager

Data Collection and Methodology

I collected the month-end stock prices of 20 securities from LankaBangla Research portal,
Investing.com and DSE archive. I also collected the DSEX return from DSE archive. In this report,
firstly, I will show the total adjusted return calculation after adjusting cash dividend, stock dividend
and right share. Then, we will be showing efficient frontier construction based on four scenarios.
Finally, I will evaluate my portfolio performance based on attribution techniques.

Limitations of the Study

Portfolio construction is a sophisticated work. It took great effort to accumulate the input data of
this report and prepared the report. While preparing this report, I have faced some limitations
• Not having ample experience in stock analysis
• Inconsistent data two sources such Lankabangla Portal and DSE archive created some
confusion
• Time constraint

Chapter 2: Theoretical Background

Portfolio Risk
Portfolio risk is a chance that the combination of assets or units, within the investments that you
own, fail to meet financial objectives. Each asset class within a portfolio carries its own risk. Higher
return comes with higher risk. Portfolio risk can be minimized by diversification.

Portfolio Return
Portfolio return refers to the gain or loss realized by a portfolio containing several types of assets.
Portfolios try to deliver returns based on the stated objectives of the investment strategy, as well
as the risk tolerance of the investors of the portfolio.

5
Efficient Portfolio
Efficient Portfolio is a portfolio offering higher return in a given risk level or lower risk at a given
Return level. A Graph is Shown Below where we can see a curve. The point Minimum Variance
Portfolio is a portfolio with lowest risk. Above part of Minimum Variance Portfolio is Called Efficient
Frontier. Rf is the risk-free rate.

10.00%
9.00%
8.00%
7.00%
Expected Return

6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00%
Risk

Efficient Frontier CAL

A line starting from the origin at risk free rate tends upward by touching the efficient frontier is
known as CML (Capital market line). The point of tangency is known as optimum or efficient
portfolio.

Covariance Matrix
Covariance shows how two asset classes move in relation to each other. A positive covariance
indicates that two assets move in tandem. A negative covariance indicates two assets move in
opposite direction.

Chapter 3: Stock Selection Criteria

I have picked 20 securities from different industries. I choose the stock based on some indicators.
Though I did not follow same rule for picking every stocks. However, I set a basic approach before
picking any stock.

• Company must be ‘A’ category company

• Company must have good dividend history
• Historical return must be positive
• Net Profit Margin must be positive
• Company may have lower to moderate P/E compared to the competitors

6
 • Company has higher net asset value compared to competitors
• Company has higher ROE compared to others.

Selected Securities
Audited
Industry Name Company Name NAV Dividend Yield ROE
P/E
ONEBANKLTD 5.76 18.95 4.63% 0.1
Banking TRUSTBANK 9.88 27.76 1.55% 0.133
BRACBANK 12.17 33.81 1.55% 0.098
Financial Institutions LANKABANGLA 29.02 17.81 1.79% 0.054
BDAUTOCA 433.24 6.74 0.02% 0.205
Engineering IFADAUTOS 53.44 40.29 1.86% 0.117
BBS 25.43 14.69 2.94% 0.12
BEACONPHAR 48.67 20.71 0.73% 0.04
Pharmaceuticals BXPHARMA 21.19 76.45 0.81% 0.102
RECKITTBEN 31.54 109.08 3.01% 1.254
BARAKAPOWER 11.71 19.45 2.79% 0.085
Fuel and Power
JAMUNAOIL 7.61 176.35 7.50% 0.126
BATBC 31.2 207.31 1.92% 0.339
Food and Allied
OLYMPIC 18 41.39 2.92% 0.259
IT Sector DAFODILCOM 62.86 14.09 1.47% 0.106
EBL1STMF 1.32* 11.78 - -
Mutual Funds
SEBL1STMF 3.55 12.93 - -
Insurance AGRANINS 33.41 18.01 2.56% -
Cement CONFIDCEM 19.93 74.83 1.25% 0.089
Jute SONALIASH 463.37 225.53 0.21% -

*Due to data insufficiency, I am using interim P/E for EBL 1st Mutual Fund

Justifications for Picking Industry and Company

1. Banking (One Bank Ltd, Trust Bank Ltd and Brac Bank): Though our banking industry
faced some impediments of interest rate cut and pandemic, this industry managed to
maintain 8-10%1 growth. One Bank, Trust Bank and BRAC Bank haver lower P/E
compared to their rivals EBL, DBBL, City Bank Ltd. Moreover, their dividend yield is
comparatively moderate to their rivals.
2. Financial Institutions (Lankabangla Finance): Lankabangla’s net profit margin is
comparatively higher the competitors such as IPDC, IDLC, GSP Finance.
3. Engineering (BD Auto Cars Ltd, Ifad Autos, Bangladesh Building Systems):
Engineering industry of Bangladesh managed a growth of 8.5%-9%2 in the past few years.

1
http://www.eblsecurities.com/AM_Resources/AM_ResearchReports/SectorReport/Bangladesh%20Bank%20Secto
r%209M%20of%202019%20Earnings%20Update.pdf
2
http://www.eblsecurities.com/AM_Resources/AM_ResearchReports/SectorReport/Bangladesh

7
 Though BD Auto Cars has an unusual P/E of 433.24, I included this stock in my portfolio.
BD Auto Cars Ltd’s historic growth is 5.1%. Their sales growth is also promising. Whereas,
Ifad Autos and BBS have lower P/E compared to industry.
4. Pharmaceuticals (Beximco Pharma, Beacon Pharma and Reckitt Benckiser):
Bangladeshi pharma industry maintained a 15.6% CAGR in the last 5 years. This industry
is expected to grow at 15% in the upcoming years. Beximco Pharma’s stock price has
been increasing in the last few months due to vaccine import news. We believe, due to
this reason, Beximco Pharma’s price will increase further in the upcoming years. Whereas,
Beacon Pharma and Reckitt Benckiser have dividend yields of 0.71% and 3%.
5. Fuel and Power (Baraka Power and Jamuna Oil): Bangladeshi fuel and power industry
is maintaining a steady growth of 8% in the past 5 years. Analysts are projecting that this
trend will be maintained also in future. Baraka Power and Jamuna both are maintaining
positive net profit margin in the last 5 years.
6. Food and Allied (British American Tobacco Bangladesh and Olympic Industries
Ltd): Though these two companies belong to same industry classification, their production
process is completely different. BATBC is a multinational tobacco company. BATBCs net
profit margin is .183. BATBC also provides handsome amount of dividend to the
shareholders. I included this stock, because this company gave 200%,500%, 600% of
cash dividend in the last 5 years. Whereas, Olympic is the industry leader of Bangladeshi
Biscuit market. They have 22%3 market share of biscuit industry. Olympic’s P/E is lower
compared to Fuwang Food and Pran AMCL.
7. IT Sector (Daffodil Computer): Daffodil Computer is one of the pioneer company of
Bangladeshi IT industry. They have positive sales growth over the last 5 years.
8. Mutual Funds (EBL 1st Mutual Funds and Southeast Bank 1st Mutual Fund): Though
mutual funds of have mixed performance in the last few years, I believe, these two stocks
will grow in the future. Their P/E is lower whereas their NAV is comparatively higher in the
industry.
9. Insurance (Agrani Insurance Ltd): Non-life insurance growth in Bangladesh is 6.88%.
Agrani Insurance has positive EPS in the last fiscal year.
10. Cement (Confidence Cement): Confidence Cement has higher ROE compared to the
industry.
11. Jute (Sonali Aansh Industries Ltd): In Jute Industry, only 3 companies are listed. Among
them, Sonali Aansh stock price is bullish. Moreover, their management and other
prospects are well. Their NAV is highest in the industry.

3
https://www.lightcastlebd.com/insights/2019/04/10/biscuits-and-confectioneries-industry-of-
bangladesh#:~:text=Of%20the%20total%20market%20value,an%20excess%20of%2065%2C000%20MT.

8
 Chapter 4: Converting Average Total Return to Expected Return

After adjusting the cash dividend and bonus share, I have calculated the average monthly return.
I converted these returns based on some indicators and judgements.

• Overall scoring range is in between 0.05% to 5%

Adjustment factors (Based on these factors stock return can be increased or decreased up to 0.05%-
5%)
Average
monthly Sales Dividend Market Industry New
Company return P/E growth yield NAV Cap growth Project Expected
ONEBANKLTD 0.93% 3.00% 1.00% - 1.50% 2% 8.60% - 1.08%
TRUSTBANK 1.73% 3.20% 1.00% - 1.50% 2% 8.60% - 2.02%
BRACBANK 1.90% 4.00% 2.50% 1.00% 2% 3% 8.60% - 2.30%
LANKABANGLA 3.20% 2.00% -1.00% - 1.50% 3% 8.60% - 3.65%
-
BDAUTOCA 5.10% 1.50% -0.50% -1.00% 1.00% 1% 9.50% - 5.53%
IFADAUTOS 0.14% 2.00% 1.00% 1.00% - 1.50% 9.50% - 0.16%
BBS 0.14% 1% 0.10% - - 1.50% 9.50% - 0.15%
BEACONPHAR 3.52% 2.00% 1% - - 2% 15% - 4.22%
BXPHARMA 2.11% 1.50% 3.00% 0.01% - 3.00% 15% 5.00% 2.70%
RECKITTBEN 2.33% 1% 2.00% - - 3.00% 15% - 2.82%
BARAKAPOWER 0.84% 1.00% - - - - 7.50% - 0.91%
JAMUNAOIL 0.49% 1.00% - - - - 7.50% - 0.53%
BATBC 0.73% - 5% 0.05% - 0.05% 11.75% - 0.86%
OLYMPIC 0.05% 1.00% 5% - - - 11.75% 2% 0.06%
-
DAFODILCOM 3.48% 1.00% 2% - - 3.00% - - 3.61%
EBL1STMF 1.80% 1.00% - - - - - - 1.81%
SEBL1STMF 1.56% 1.00% - - - - - - 1.58%
AGRANINS 3.53% 2% - - - - 6.88% - 3.84%
CONFIDCEM 1.79% 1.00% 0.01% - - - 11.50% - 2.01%
SONALIASH 4.04% - 3% 0.20% 0.30% 0.04% 9.16% - 4.55%
• Based on market capital 0.5% to 3% are given to particular companies. For small cap
companies score should 0.5% to 1%, whereas for mid cap companies 1.5% to 2% scores
are given. For large companies 3% score is given
• Industry growth rates are kept as same
• For moderate to lower P/E ratio, 2.5% to 4% scores are given
• For higher sales growth positive scores are given, whereas, negative scores are given in
case of lower net profit margin
• For significant new project 2% to 5% scores are given
• In some cases, scores are not given. My viewpoint is that, if I give score on those criteria,
expected prices will be more inflated.
• Due to proper data, mutual fund industry growth rate has not been used
• Expected return= Average monthly return*(1+ Summations of factors)

9
 Chapter 5: Constructing Efficient Portfolio
After calculating expected return, we need to prepare the covariance matrix and perform scenario
analysis. Here are the assumptions and major factors before constructing my portfolio.

Factors of Considerations
1. Risk-free rate: For simplicity purpose, I am using the cut-off yield of Bangladesh Bank 10
years treasury bonds. The risk-free rate hence is 5.75%.

Issue Date Type Cutoff Yield

10 years Treasury
21/01/2021 bond 5.75%
Monthly Risk-free Rate 0.48%
2. Covariance Matrix: My assumption is that covariance matrix will not be changed as
much. In the final excel sheet, covariance matrix is given based on total return.
3. Constructing Equal Weighted Portfolio: In this case, an investor invests all his funds
equally in the portfolio. Here is the result

Rf 0.48%
Portfolio Return 2.22%
Portfolio Variance 0.0029
Portfolio Standard Deviation 5.41%
Sharpe Ratio 0.3213
4. Scenario Analysis: I have simulated the risk- return scenarios of my portfolio on four
cases.
a) Short Sales and Risk-free Lending Borrowing Allowed
b) No Shorts Sales with Risk-free Lending Borrowing
c) Short Sale is allowed and Risk-free Lending Borrowing is not allowed
d) No Shorts Sale and No Risk-free Borrowing Lending

Scenario 1: Shorts Sales Allowed Along with Risk-free Borrowing Lending

In first case, our objective is to maximize Sharpe Ratio (θ) / risk adjusted return. In this case, our
solver function should be:
i) Maximize θ4
ii) Constraints to: ∑ Xi = 1
iii) Setting portfolio return: 1% to 9%

4
Θ= (Portfolio Return-Risk-free Rate)/Portfolio Standard Deviation

10
 Efficient Frontier Determination when Short Sale Allowed and Risk-free Lending and
Borrowing Allowed
Portfolio Return Base 1.00% 2.5% 3.00% 3.5% 4.00% 5.0% 6.00% 7.0% 8.00% 9.00%
Expected
Company Name Return Weight Weight Weight Weight Weight Weight Weight Weight Weight Weight Weight
ONEBANKLTD 1.08% -56% 6% -8% -12% -17% -22% -31% -41% -50% -59% -69%
TRUSTBANK 2.02% 35% -1% 5% 6% 8% 10% 13% 17% 21% 24% 28%
BRACBANK 2.30% 15% 4% 5% 6% 6% 7% 7% 8% 9% 10% 11%
LANKABANGLA 3.65% 8% -5% -1% 1% 2% 3% 6% 9% 11% 14% 17%
BDAUTOCA 5.53% 6% 0% 1% 1% 2% 2% 3% 3% 4% 5% 5%
IFADAUTOS 0.16% -44% 6% -6% -10% -14% -18% -26% -34% -42% -49% -57%
BBS 0.15% -24% 5% 1% 0% -2% -3% -6% -8% -11% -14% -16%
BEACONPHAR 4.22% 41% 12% 22% 26% 29% 33% 40% 47% 54% 61% 68%
BXPHARMA 2.70% 14% -2% 7% 10% 13% 16% 21% 27% 33% 39% 44%
RECKITTBEN 2.82% 9% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11%
BARAKAPOWER 0.91% -5% -2% -3% -4% -4% -4% -5% -6% -7% -7% -8%
JAMUNAOIL 0.53% -16% 31% 20% 17% 13% 10% 3% -4% -10% -17% -24%
BATBC 0.86% -8% 14% 12% 11% 11% 10% 9% 8% 6% 5% 4%
BANGAS 0.06% -17% 6% -12% -19% -25% -31% -44% -57% -69% -82% -94%
DAFODILCOM 3.61% 16% -1% 0% 1% 2% 2% 4% 5% 6% 7% 9%
EBL1STMF 1.81% 34% -4% 5% 9% 12% 15% 21% 27% 34% 40% 46%
SEBL1STMF 1.58% 46% 29% 36% 38% 41% 44% 48% 53% 58% 63% 68%
AGRANINS 3.84% 2% -2% 0% 0% 1% 1% 2% 4% 5% 6% 7%
CONFIDCEM 2.01% 27% -1% 5% 7% 10% 12% 16% 20% 24% 29% 33%
SONALIASH 4.55% 20% -5% -1% 1% 2% 4% 7% 10% 13% 15% 18%

Monthly risk-free
rate 0.48% 0.48% 0.48% 0.48% 0.48% 0.48% 0.48% 0.48% 0.48% 0.48% 0.48%
Portfolio return 6.04% 1.00% 2.50% 3.00% 3.50% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%
Portfolio variance 0.0055 0.0008 0.0009 0.0011 0.0014 0.0017 0.0026 0.0039 0.0054 0.0073 0.0094
P(σ) 7.40% 2.81% 3.01% 3.31% 3.70% 4.14% 5.14% 6.22% 7.36% 8.52% 9.71%
Sharpe Ratio 0.7510 0.1848 0.6713 0.7606 0.8168 0.8503 0.8800 0.8872 0.8862 0.8824 0.8777

Here, we found the optimum weight in different return scenario. We combined the risk- return of
different cases and built the efficient portfolio.

11
 Short Sale Allowed along with Risk-Free
Borrowing-Lending
10.00%

8.00%
Expected Return

6.00%

4.00%

2.00%

0.00%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00%
Risk

Efficient Frontier

Graph 1: Efficient Frontier of SS allowed and Risk-free borrowing lending allowed

Scenario 2: Shorts Sale Not Allowed and Risk-free Borrowing Lending Allowed
Here our objective is same as first case. But here our weights must not be negative because
shorts sale is not permitted. Solver function should be:
i) Maximize θ
ii) Constraints to: ∑ Xi = 1
iii) Setting Portfolio return: 1% to 4.5%
iv) Making unconstraint values non-negative

Efficient Frontier Determination when Short Sale not Allowed and Risk-free
Lending and Borrowing Allowed
3.00
Portfolio Return Base 1.00% 2.5% 3.5% 4.00% 4.5%
%
Expecte Weigh Weigh
Company Name Weight Weight Weight Weight Weight
d Return t t
ONEBANKLTD 1.08% 0% 0% 0% 0% 0% 0% 0%
TRUSTBANK 2.02% 5% 0% 5% 5% 3% 0% 0%
BRACBANK 2.30% 3% 0% 4% 4% 7% 9% 0%
LANKABANGLA 3.65% 0% 0% 0% 0% 0% 0% 0%
BDAUTOCA 5.53% 3% 0% 2% 4% 6% 8% 15%
IFADAUTOS 0.16% 0% 3% 0% 0% 0% 0% 0%
BBS 0.15% 0% 3% 0% 0% 0% 0% 0%
BEACONPHAR 4.22% 27% 0% 23% 30% 41% 54% 60%
BXPHARMA 2.70% 7% 0% 4% 7% 6% 4% 0%
RECKITTBEN 2.82% 16% 7% 14% 16% 13% 10% 0%

12
 BARAKAPOWE
0.91% 0% 0% 0% 0% 0% 0% 0%
R
JAMUNAOIL 0.53% 0% 34% 3% 0% 0% 0% 0%
BATBC 0.86% 0% 0% 9% 0% 0% 0% 0%
BANGAS 0.06% 0% 16% 0% 0% 0% 0% 0%
DAFODILCOM 3.61% 1% 1% 1% 1% 1% 0% 0%
EBL1STMF 1.81% 3% 0% 1% 2% 0% 0% 0%
SEBL1STMF 1.58% 30% 36% 32% 27% 13% 0% 0%
AGRANINS 3.84% 0% 0% 0% 0% 0% 0% 0%
CONFIDCEM 2.01% 0% 0% 0% 0% 0% 0% 0%
SONALIASH 4.55% 4% 0% 2% 5% 10% 16% 25%

Monthly risk-free
0.48% 0.48% 0.48% 0.48% 0.48% 0.48% 0.48%
rate
Portfolio return 2.88% 1.00% 2.50% 3.00% 3.50% 4.00% 4.50%
Portfolio variance 0.0015 0.0010 0.001 0.0016 0.0026 0.00424 0.0071
P(σ) 3.85% 3.31% 3.35% 4.06% 5.16% 6.51% 8.45%
Sharpe Ratio 0.6225 0.1571 0.602 0.6210 0.5855 0.5404 0.4759
After compiling different risk- return scenario, we have determined the efficient frontier.

SHO RT SA LE NOT A LLOW E D A ND RI SK - FRE E

LE NDI NG A ND BO RROW I NG A LLOW E D
Efficient Frontier

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%

Graph 2: Efficient Frontier of SS not allowed and Risk-free borrowing lending allowed

Scenario 3: Shorts Sale Allowed and Risk-free Borrowing Lending Not Allowed
In this case we need to maximize theta as usual. But the constraint is there is no risk-free rate.
So, we have to assume different risk-free rate before running solver. After that, we got different
risk and return combinations.
Solver functions are:
i) Objective function: Maximize Portfolio Theta
ii) Constraints to: ∑ Xi = 1
iii) Untick the non-negative value function

13
 Efficient Frontier Determination when Short Sale Allowed and Risk-free Lending and Borrowing not
Allowed
Risk free rate Rf=5.75%** Rf=2.25% Rf=3.2% Rf=4% Rf=4.35% Rf=5% Rf=6.29%
Company Name Expected Return Weight Weight Weight Weight Weight Weight Weight
ONEBANKLTD 1.08% -29% -35% -38% -41% -42% -44% -50%
TRUSTBANK 2.02% 9% 11% 12% 13% 13% 14% 15%
BRACBANK 2.30% 9% 18% 19% 20% 20% 21% 24%
LANKABANGLA 3.65% 6% 7% 7% 8% 8% 9% 11%
BDAUTOCA 5.53% 0% 2% 2% 2% 2% 2% 2%
IFADAUTOS 0.16% -19% -29% -31% -33% -34% -36% -41%
BBS 0.15% -3% -4% -4% -5% -5% -6% -7%
BEACONPHAR 4.22% 17% 42% 44% 46% 46% 48% 52%
BXPHARMA 2.70% 19% 16% 17% 18% 19% 20% 22%
RECKITTBEN 2.82% 7% 7% 7% 6% 6% 6% 5%
BARAKAPOWER 0.91% -3% -3% -3% -3% -3% -3% -3%
JAMUNAOIL 0.53% 10% 3% 2% 0% 0% -2% -6%
BATBC 0.86% 10% 12% 12% 12% 12% 12% 11%
BANGAS 0.06% -62% -55% -59% -62% -64% -68% -76%
DAFODILCOM 3.61% 3% 3% 3% 3% 3% 4% 4%
EBL1STMF 1.81% 16% 22% 23% 25% 25% 27% 30%
SEBL1STMF 1.58% 93% 52% 53% 54% 55% 56% 60%
AGRANINS 3.84% 2% 4% 4% 4% 5% 5% 6%
CONFIDCEM 2.01% 11% 18% 19% 20% 20% 21% 24%
SONALIASH 4.55% 4% 10% 11% 12% 12% 13% 16%

Monthly risk-free rate 0.479% 0.188% 0.267% 0.333% 0.363% 0.417% 0.524%
Portfolio return 4.00% 5.02% 5.26% 5.51% 5.60% 5.87% 6.43%
Portfolio variance 0.003003 0.003052 0.00338 0.0037233 0.00386 0.00426 0.00520
Portfolio standard
deviation(σ) 5.48% 5.52% 5.81% 6.10% 6.21% 6.53% 7.21%
Sharpe Ratio 0.642488 0.87393 0.859946 0.848747 0.844008 0.835530 0.819830

Here is the efficient frontier:

14
 Graph 3: Efficient Frontier of SS allowed and Risk-free borrowing lending not allowed

Scenario 4: Shorts Sale Not Allowed and Risk-free Borrowing Lending Not Allowed
In the final case, putting aside the objective of Theta maximization, we need the minimize the
standard deviation of our portfolio. Here solver functions are:
i) Minimize portfolio standard deviation
ii) Constraint to ∑ Xi = 1 (weight=100%)
iii) Setting portfolio return: Portfolio return: 0.65%, 0.75%, 1%,2%, 2.5%, 3%, 3.5%, 4%
and 4.5%
iv) Making unconstraint values non-negative

Efficient Frontier Determination when Short Sale not Allowed and Risk-free Lending
and Borrowing Not Allowed
Portfolio Pr=0.65 Pr=0.75 Pr=1 Pr=2 Pr=2.5 Pr=3 Pr=3.5 Pr=4 Pr=4.5
Return Base % % % % % % % % %
Expect
Company ed Weig Weig Weig Weigh Weig Weigh Weig Weigh
Name Return ht Weight Weight ht ht t ht t ht t
ONEBANKLT
D 1.08% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
TRUSTBANK 2.02% 1% 0% 0% 0% 3% 5% 5% 3% 0% 0%
BRACBANK 2.30% 3% 0% 0% 0% 4% 3% 4% 7% 9% 0%
LANKABANG
LA 3.65% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
BDAUTOCA 5.53% 0% 0% 0% 0% 0% 0% 4% 6% 8% 15%
IFADAUTOS 0.16% 0% 4% 3% 3% 0% 0% 0% 0% 0% 0%
BBS 0.15% 2% 5% 4% 4% 0% 0% 0% 0% 0% 0%
BEACONPHA
R 4.22% 13% 0% 0% 2% 18% 22% 30% 41% 53% 60%
BXPHARMA 2.70% 0% 0% 0% 0% 1% 4% 7% 6% 4% 0%
RECKITTBEN 2.82% 9% 0% 0% 4% 12% 15% 16% 13% 10% 0%
BARAKAPO
WER 0.91% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
JAMUNAOIL 0.53% 22% 34% 33% 31% 15% 3% 0% 0% 0% 0%
BATBC 0.86% 15% 12% 13% 12% 12% 7% 0% 0% 0% 0%
BANGAS 0.06% 0% 23% 18% 13% 0% 0% 0% 0% 0% 0%
DAFODILCO
M 3.61% 0% 0% 0% 0% 0% 3% 1% 0% 0% 0%
EBL1STMF 1.81% 0% 0% 0% 0% 1% 2% 2% 0% 0% 0%
SEBL1STMF 1.58% 35% 21% 28% 32% 35% 33% 27% 13% 0% 0%
AGRANINS 3.84% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
CONFIDCEM 2.01% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
SONALIASH 4.55% 0% 0% 0% 0% 0% 2% 5% 10% 16% 25%

Monthly risk - 0.48 0.48 0.48 0.48 0.48

free rate 0.48% % 0.48% 0.48% % % 0.48% % 0.48% % 0.48%
Portfolio 1.72 1.00 2.00 3.00 4.00
return 2.22% % 0.65% 0.75% % % 2.50% % 3.50% % 4.50%
Portfolio 0.000 0.001 0.000 0.001 0.004
variance 0.0029 8 0.0014 0.0012 0 9 0.0012 6 0.0027 2 0.0071

15
 Portfolio
standard 2.86 3.24 2.94 4.06 6.51
deviation(σ) 5.41% % 3.70% 3.53% % % 3.41% % 5.16% % 8.45%
0.432 0.160 0.516 0.620 0.540
Sharpe Ratio 0.3213 3 0.0459 0.0765 5 5 0.5919 8 0.5856 4 0.4760

Here is our efficient frontier:

No Short Sales and No Riskless Lending-

Borrowing
5.00%
4.50%
4.00%
Expected Return

3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%
Risk

Efficient Frontier

Graph 4: Efficient Frontier of No short sale and no risk less borrowing lending

Chapter 6: Portfolio Performance Evaluation

After constructing our frontier, we need to calculate some ratios based on which our portfolio
performance can be measured. I am using some tools to represent my portfolio performance.

Sharpe Ratio:
I calculated and compared the Sharpe ratio for Short sale allowed with risk free borrowing lending
and Shorts sale not with risk free borrowing and lending.
• Short Sale with Riskless Borrowing and Lending:
Portfolio return (base case) = 6.27%
Portfolio standard deviation= 6.52%
Risk free rate = 0.48%
Sharpe ratio = (6.27%-0.48%)/6,52% = 0.8874
• No Short Sale with Riskless Borrowing and Lending:
Portfolio return (base case) = 2.88%
Portfolio standard deviation = 3.85%

16
 Sharpe Ratio = (2.88%-0.48%)/3.85%= 0.62256

Treynor Ratio:
• Short Sale with Riskless Borrowing and Lending:
Portfolio return (base case) = 6.27%
Risk free rate = 0.48%
Portfolio beta = 0.08876 (Appendix B)
Treynor Ratio = (6.27%-0.48%)/0.08876 = 0.6518
• No Short Sale with Riskless Borrowing and Lending:
Portfolio return (base case) = 6.27%
Risk free rate = 0.48%
Portfolio beta = 0.10207 (Appendix B)
Treynor Ratio = (6.27%-0.48%)/0.10207 = 0.2348

Jensen Alpha Ratio:

• Short Sale with Riskless Borrowing and Lending:
DSEX return (market return) = 0.54% (Appendix B)
Alpha = Portfolio return - [Risk free rate + Portfolio beta (Market return -Risk
free rate)
=6.27% - [0.08876(.54%-.48%)] = 5.780%
• No Short Sale with Riskless Borrowing and Lending:
Alpha= 2.877%- [0.48%+ 0.102070(0.54%-0.48%) = 2.391%

Information Ratio:
• Short Sale with Riskless Borrowing and Lending:
Tracking error= 7.95% (Appendix)
DSEX return = 0.54%
Information ratio = (Portfolio Return – Benchmark return)/ Tracking error
= (6.27%-0.54%)/7.95% = 0.7209
• No Short Sale with Riskless Borrowing and Lending:
IR = (2.88%-0.54%)/ 5.01% = 0.4669

M Squared Ratio: The purpose M² ratio is to create a portfolio that mimics the risk of the
market portfolio by changing the weights of the actual portfolio P and the risk-free asset until
portfolio P’ has the same total risk as the market.
M^2= Sharpe Ratio * Standard Deviation of Market) + Risk free rate

• Short Sale with Riskless Borrowing and Lending:

M^2= (0.8874*0.0518) + 0.48% = 5.08%

• No Short Sale with Riskless Borrowing and Lending:

M^2= (0.6226*0.0518) + 0.48% = 3.70%

17
 Summary:

Case
Ratio Interpretation
SS and RF No SS and RF
Sharpe Ratio 0.88739 0.6226 Total risk adjusted return is higher in first case
Treynor Ratio 0.65175 0.2348 Stock risk adjusted return is higher in first case
Alpha 0.05780 0.0239 Both situation can incur excess return
Information Ratio 0.7209 0.4669 First case incur more tracking error than second case
M Squared Ratio 5.08% 3.70% Both cases mimiced and performed abover benchmark

Chapter 7: Portfolio Performance Attribution

In conclusion, we need to perform attribution analysis to find out how much value added from
Pure Sector Allocation, Selection Criteria and within sector selection.

Scenario 1: Short Sale with and Riskless Borrowing Lending

Sectoral Within Pure Within
Benchmark Benchmark Within Sector sector Sector Selection Sector Value
Industry name Return Weight Portfolio return weight Allocation interation Selection Added
Banks 0.73% 16.72% 0.09% -17% 0.06% 0.22% -0.11% 0.16%
Financial
4.73%
Institutions 0.52% 0.00% 0% 0.02% 0.02% -0.02% 0.02%
-
4.80%
Insurance 1.45% 0.00% 0% -0.03% 0.07% -0.07% 0.03%
Food & Allied
7.96%
Product 0.30% 0.03% -53% 0.37% 0.16% -0.02% 0.51%
Pharmaceuticals &
15.38%
Chemicals 0.46% 3.15% 89% -0.32% 1.97% 0.41% 2.06%
Textile 0.55% 3.09% 0.01% 0.02% -0.02% 0.01%
Engineering 2.67% 10.65% 0.12% -41% -0.92% 1.33% -0.27% 0.14%
Ceramic -0.08% 0.67% 0.01% 0.00% 0.00% 0.01%
Tannery -0.41% 0.53% 0.01% 0.00% 0.00% 0.01%
-
0.43%
Paper & Printing 19.42% -0.08% 0.08% -0.08% 0.08%
-
0.06%
Jute 3.45% 0.47% 10% 0.26% -0.31% 0.00% 0.05%
-
2.19%
Cement -0.68% 0.43% 21% -0.30% 0.21% 0.02% 0.07%
Mutual Funds 0.80% 1.29% 1.39% 84% -0.09% 0.49% 0.01% 0.40%
Fuel & Power 0.55% 12.68% -0.08% -11% 0.09% 0.15% -0.08% 0.16%
Services & Real
0.47%
estate -0.13% 0.00% 0.00% 0.00% 0.00%
-
0.73%
IT Sector 3.94% 0.19% 5% 0.13% -0.17% -0.03% 0.06%
Telecommunication 0.65% 13.57% 0.04% 0.09% -0.09% 0.04%
Travel and Leisure 0.41% 0.76% 0.00% 0.00% 0.00% 0.00%
Miscellaneous 0.77% 3.18% 0.00% 0.02% -0.02% 0.00%
Corporate Bond -0.22% 0.12% 0.00% 0.00% 0.00% 0.00%

Portfolio
benchmark return 0.90% 3.20%

First scenario can increase the economic value by 3.25%.

18
 Scenario 2: No Short Sale with and Riskless Borrowing Lending
Sectoral Within Pure Within
Benchmark Benchmark Within Sector sector Sector Selection Sector Value
Industry name Return Weight Portfolio return weight Allocation interation Selection Added
Banks 0.73% 16.72% 0.18% 9% 0.06% 0.04% -0.09% 0.01%
Financial 0.52% 4.73% 0.00% 0% 0.04% 0.02% -0.02% 0.04%
Institutions
Insurance 1.45% 4.80% 0.00% 0% 0.04% 0.07% -0.07% 0.04%
Food & Allied 0.30% 7.96% 0.00% 0% 0.07% 0.02% -0.02% 0.07%
Product
Pharmaceuticals & 0.46% 15.38% 1.77% 50% 0.30% 0.45% 0.20% 0.95%
Chemicals
Textile 0.55% 3.09% 0.03% 0.02% -0.02% 0.03%
2.67% 10.65% 0.17% 3% 0.05% 0.19% -0.27% -
Engineering 0.02%
Ceramic -0.08% 0.67% 0.01% 0.00% 0.00% 0.01%
Tannery -0.41% 0.53% 0.00% 0.00% 0.00% 0.00%
Paper & Printing 19.42% 0.43% 0.00% 0.08% -0.08% 0.00%
3.45% 0.06% 0.17% 4% -0.03% -0.12% 0.00% -
Jute 0.15%
Cement -0.68% 2.19% 0.00% 0% 0.02% -0.01% 0.01% 0.02%
0.80% 1.29% 0.53% 33% -0.12% -0.08% 0.00% -
Mutual Funds 0.21%
Fuel & Power 0.55% 12.68% 0.00% 0% 0.11% 0.07% -0.07% 0.11%
Services & Real -0.13% 0.47% 0.00% 0.00% 0.00% 0.00%
estate
3.94% 0.73% 0.04% 1% 0.00% -0.01% -0.03% -
IT Sector 0.04%
Telecommunication 0.65% 13.57% 0.12% 0.09% -0.09% 0.12%
Travel and Leisure 0.41% 0.76% 0.01% 0.00% 0.00% 0.01%
Miscellaneous 0.77% 3.18% 0.03% 0.02% -0.02% 0.03%
Corporate Bond -0.22% 0.12% 0.00% 0.00% 0.00% 0.00%

Portfolio 0.90% 1.03%

benchmark
return

Second scenario can increase the total value by 1.03%.

Chapter 8: Conclusion
After a rigorous process, I constructed my portfolio and efficient frontier. In the two base cases of
short sale allowed with risk less borrowing-lending and short sale not allowed with risk less
borrowing lending, my portfolio provides optimal returns (6.25% and 2.88%). From the
performance evaluation, I have found that, my portfolio has lower tracking error. In both scenarios,
my portfolio has positive Sharpe ratios (0.8874 and 0.6226). From the M squared ratio calculation,
we have found that, this portfolio can mimic the market portfolio and perform better. From portfolio
attribution we have found that, this portfolio can increase the total economic value by (3.2% and
1.03%).

19
Works Cited
Banlgadesh Securities Exchange Commission. (n.d.). Right Issues Offer Document. Retrieved from
Banlgadesh Securities Exchange Commission: https://www.sec.gov.bd/home/rioffer

Gruber, E. (2005). Modern Portfolio Management.

Lankabangla Finance . (2015, January). Price Archieve: Lankabangla Financial Portal. Retrieved from
https://lankabd.com/Home/PriceArchive

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Appendix A: Excess Return Calculation
Company Code Expected Return Rf Excess Return
ONEBANKLTD 1.08% 0.48% 0.60%
TRUSTBANK 2.02% 0.48% 1.54%
BRACBANK 2.30% 0.48% 1.82%
LANKABANGLA 3.65% 0.48% 3.17%
BDAUTOCA 5.53% 0.48% 5.05%
IFADAUTOS 0.16% 0.48% -0.32%
BBS 0.15% 0.48% -0.33%
BEACONPHAR 4.22% 0.48% 3.74%
BXPHARMA 2.70% 0.48% 2.22%
RECKITTBEN 2.82% 0.48% 2.34%
BARAKAPOWER 0.91% 0.48% 0.43%
JAMUNAOIL 0.53% 0.48% 0.05%
BATBC 0.86% 0.48% 0.38%
BANGAS 0.06% 0.48% -0.42%
DAFODILCOM 3.61% 0.48% 3.14%
EBL1STMF 1.81% 0.48% 1.34%
SEBL1STMF 1.58% 0.48% 1.10%
AGRANINS 3.84% 0.48% 3.36%
CONFIDCEM 2.01% 0.48% 1.53%
SONALIASH 4.55% 0.48% 4.07%

Appendix B: Performance Evaluation Ratios

Short Sales with Riskless Borrowing No Short Sales with Riskless Borrowing
Lending Lending
Company Exp. Weig Stock Company Exp. Weig Stock
Code Return ht Beta Code Return ht Beta
ONEBANKLT 0.4452 ONEBANKLT 0.44528
D 1.08% -43% 9 D 1.08% 0% 76
0.2193 0.21930
TRUSTBANK 2.02% 18% 0 TRUSTBANK 2.02% 5% 10
0.3382 0.33825
BRACBANK 2.30% 8% 6 BRACBANK 2.30% 3% 62
LANKABANG 0.9035 LANKABANG 0.90350
LA 3.65% 9% 1 LA 3.65% 0% 58
- -
0.7428 0.74286
BDAUTOCA 5.53% 3% 7 BDAUTOCA 5.53% 3% 91

21
 0.5800 0.58001
IFADAUTOS 0.16% -36% 1 IFADAUTOS 0.16% 0% 47
0.1566 0.15659
BBS 0.15% -9% 0 BBS 0.15% 0% 63
BEACONPHA 0.1296 BEACONPHA 0.12961
R 4.22% 49% 1 R 4.22% 27% 38
0.6123 0.61233
BXPHARMA 2.70% 29% 4 BXPHARMA 2.70% 7% 85
- -
0.0138 0.01382
RECKITTBEN 2.82% 11% 2 RECKITTBEN 2.82% 16% 33
BARAKAPO 0.4385 BARAKAPO 0.43851
WER 0.91% -6% 1 WER 0.91% 0% 39
0.1329 0.13294
JAMUNAOIL 0.53% -5% 4 JAMUNAOIL 0.53% 0% 25
0.2805 0.28057
BATBC 0.86% 7% 8 BATBC 0.86% 0% 55
0.0898 0.08980
OLYMPIC 0.06% -60% 1 OLYMPIC 0.06% 0% 97
DAFODILCO 0.5619 DAFODILCO 0.56196
M 3.61% 5% 7 M 3.61% 1% 67
0.1821 0.18218
EBL1STMF 1.81% 29% 9 EBL1STMF 1.81% 3% 63
0.0007 0.00077
SEBL1STMF 1.58% 55% 8 SEBL1STMF 1.58% 30% 87
0.5901 0.59009
AGRANINS 3.84% 4% 0 AGRANINS 3.84% 0% 99
0.2590 0.25907
CONFIDCEM 2.01% 21% 7 CONFIDCEM 2.01% 0% 49
0.4368 0.43684
SONALIASH 4.55% 10% 4 SONALIASH 4.55% 4% 03

Rf 0.48% Rf 0.48%
2.877
Port. Return 6.265% Port. Return %
0.08876 0.1020
Port. Beta 36 Port. Beta 7
Port. Port. 0.0014
Variance 0.00425 Variance 8
Port Port
Standard Standard
Dev. 6.519% Dev. 3.85%
DSEX Return 0.54% DSEX Return 0.54%
Sharpe Ratio 0.8874 Sharpe Ratio 0.6226
Treynor Treynor
Ratio 0.6518 Ratio 0.2348

22
 2.391
Alpha 5.780% Alpha %
Tracking 5.01
Error 7.95% Tracking Error %
Information Information 46.69
Ratio 72.09% Ratio %
Market Market
Standard Standard
dev 5.18% dev 5.18%
M^2 5.08% M^2 3.70%

23
24