Executive summary

Pharmaceuticals company contribute one of most economy in our country. In

this report we analyze optimal portfolio of Markowitz model in the
pharmaceuticals company. Here we select five pharmaceuticals company for
optimal portfolio analysis. In the Markowitz model denotes the variance,
covariance, sharp ratio, rank & expected return analysis. All of this analysis
refers to the company’s position in the market.
In this report we include Advanced Chemical Industries (ACI) Limited, The
ACME Laboratories Ltd, Beximco Pharmaceuticals Ltd, Opsonin Pharma
Ltd, Insepta Pharmaceutical. We analyze optimal portfolio of Markowitz
model under these company. But Opsonin Pharma Ltd, Insepta
Pharmaceutical all necessary data are not available in the company’s website.
For this reason, we include Advanced Chemical Industries (ACI) Limited,
The ACME Laboratories Ltd, Beximco Pharmaceuticals Ltd pharma aids for
our necessary analysis. Here we include expected return, variance, covariance,
sharp ratio & rank of the company. These three companies all data are
available in their website in the year 2016-2020. With the data we calculate
the optimal portfolio of marquis model.

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 Origin of the report
This report is prepared as a term paper assignment for our
Investment Analysis (F-407) course. While preparing the report, we
gave our best effort to incorporate the theoretical aspect of the
subject while emphasizing on the practical implementation of the
various functions that we learned in our course.
Objective of the report
The major objectives behind the study are mentioned below:
 To relate theoretical knowledge to practical oriented problem.
 To fulfill the partial requirement of B.B.A. program
 To provide overall idea about Current Scenario and Optimal
Portfolio Under Markowitz model of Pharmaceutical company in
Bangladesh.
Limitation of the report
The major limitations of the study are:
 Inefficiency in some field of analysis.
 Lack of Experience
 Lack of knowledge

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 Methodology
To prepare this report we mainly depend on primary and secondary data. But also
take some help from our seniors. In order to know about Optimal Portfolio Under
Markowitz model of Pharmaceutical companies in Bangladesh., we follow few
methods & through which we come to know them more deeply & elaborately.
Methods we follow to collect information is given in below:
Collecting secondary data:
We went to our seniors to know about the procedure of making a good report. Then
we ask for advices that should be followed to collect a standard data.
FGD (Focus Group Discussion):
In this process we asked a number of experts about their opinions, beliefs &
attitudes towards the optimal portfolio under Markowitz model of pharmaceutical
companies in Bangladesh. We also questioned them about performance, concept,
ideas & concerns of organizations for pharmaceutical industry in Bangladesh, we
follow few methods & through which we come to know them more deeply &
elaborately.
Methods we follow to collect information is given in below:
Collecting secondary data:
We went to our seniors to know about the procedure of making a good report. Then
we ask for
advices that should be followed to collect a standard data.
FGD (Focus Group Discussion):
In this process we asked a number of experts about their opinions, beliefs &
attitudes towards the performance, concept, ideas & concerns of organizations for
pharmaceutical industry in Bangladesh.
Internet
To know more elaborately about the optimal portfolio under Markowitz model of
pharmaceutical companies in Bangladesh, we also take the help of internet.

Process of collecting primary data:

We collected our necessary primary data by the help of internet.

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 Scope of the report

Everything has some advantage which helps that work to be completed

thoroughly. We get
some scope which helps us to make a standard report. Major of them are-
 Enough Time: We have got enough time to prepare a report so that we
could gather
information with much tension free mind.
 Easy access to internet: We have a very smooth access to internet in our
laptops. So
that we didn’t face any kind of trouble in this sector.
 Flexible Topic: The topic of us was much flexible to execute. So, we don’t
feel any
problem about our topic.

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 Chapter One
(Introduction and overview
of the companies)

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1.1 Introduction
There are several sectors on which Bangladesh can be proud of and undoubtedly the
pharmaceutical sector is one of these sectors, rather it is the sector, which is the second-
largest contributor to the government exchequer. There are about 257 companies in this
sector and the approximate total market size is about Taka 30,000 million per year of
which about 95% of the total requirement of medicines is created by the local companies
and the rest 5% is imported. The imported drugs mainly comprise of the cancer drugs,
vaccines for viral diseases, hormones etc.

In fact, the real growth of local pharmaceutical industries started after the “Drug Control
Act” was promulgated in 1982 in Bangladesh to restrict massive import of drugs and to
encourage local manufacturing of the same. A lot of multinational companies (MNCs)
became unhappy for this development.

In Bangladesh, pharmaceutical is now one of the fastest growing sectors. In 2004, the total
size of the pharma market of Bangladesh was estimated to be Tk. 28,416 Million. With an
annual growth rate of about 10%, Bangladesh Pharmaceutical Industry is now heading
towards self-sufficiency in meeting the local demand. Bangladesh pharmaceutical industry
is the second highest contributor to the national exchequer after garments, and it is the
largest white-collar intensive employment sector of the country.

There are about 450 generics registered in Bangladesh. Out of these 450 generics, 117 are
in the controlled category in the essential drug list. The remaining 333 generics are in the
decontrolled category, the total number of brands /items that are registered in Bangladesh
is currently estimated to be 5,300, while the total number of dosage forms and strengths are
8,300.

Bangladesh pharmaceutical industry is mainly dominated by domestic manufacturers. Of

the total pharmaceutical market of Bangladesh, the local companies are enjoying a market
share reaching around 80%, while the MNCs are having a market share of 20%. Out of the
top ten pharmaceutical companies in Bangladesh, eight are local pharmaceutical
companies, while only two are MNCs. The top two domestic manufacturers, namely
Square and Beximco Pharma are having a combined market share of about 25% of the total
pharmaceutical market of the country.

The Bangladesh Association of Pharmaceutical Industries – BAPI (Bangladesh Aushad

Shilpa Samity in Bengali), established in 1972 with just 33 members, has been playing a
very vital role for development of this sector. Today, BAPI is a very strong organization
having as many as 144 companies (as listed at Annexure-I) as its members.

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1.2 Overview of the companies:
Advanced Chemical Industries (ACI) Limited
Imperial Chemical Industries, a British multinational established a Branch in the then East
Pakistan which was converted into a company after liberation, named ICI Bangladesh
Manufacturers Limited. In 1992 ICI divested its investment in Bangladesh to the
Management, when its name was changed to Advanced Chemical Industries (ACI)
Limited. Advanced Chemical Industries (ACI) Limited, being one of the largest
conglomerates in Bangladesh with a multinational heritage operates across the country
through its four diversified strategic business units. ‘ACI Pharmaceuticals’ is dedicated to
improve the health of the people of Bangladesh through introduction of innovative and
reliable Pharmaceuticals products ’ACI Consumer Brands’ is adding value to the daily life
of consumers through its Toiletries, Home Care, Hygiene, Electrical, Electronics, Mobile,
Salt, Flour, Foods, Rice, Tea, Edible Oil, Paints and International Businesses. ‘ACI
Agribusinesses’ is the largest integrator in Bangladesh in Agriculture, Livestock, Fisheries,
Farm Mechanization, Infrastructure Development Services and Motorcycle. ‘ACI Retail
Chain’ is the largest retail chain in Bangladesh operating through its 144 SHWAPNO
outlets including 34 newly opened express outlets across the country by touching the lives
of over 45,000 plus households each day. The Company contributed Taka 4,318 million to
the National Exchequer during FY 2019-2020 in the form of corporate tax, custom duty
and value added tax.
The ACME Laboratories Ltd.

The ACME Laboratories Ltd. is a leading company for manufacturing world-class and top-
quality pharmaceutical products in Bangladesh. We are currently producing more than 500
products in different dosage forms covering broader therapeutic categories which include
anti-infective, cardiovascular, antidiabetics, gastrointestinal, CNS, respiratory disease etc.
among many others. The success in local market prompted us to explore the international
market and over the years we gained a firm presence in South East Asia, Africa and
Central America and continuously discovering new horizons to improve the quality of life
for patients, to further the success of our customers and to help meet global challenges.
Through the outstanding knowledge, professionalism and commitment of more than 7000
employees, we are consistently building upon our facilities, capabilities and also portfolio
to meet the growing health care needs.

We are united, inspired and fueled by our mission to ensure health vigor and happiness for
all. Since our founding in 1954 by Mr. Hamidur Rahman Sinha, an entrepreneur and
philanthropist in this region of then British divided Indian sub-continent, we have been
committed to offering solutions to our most pressing health care needs. More than half a
century later, we remain true to our founder’s vision and values – to produce high quality
medicines with integrity, customer focus, pro-activity, team spirit, excellence and desire to
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win and responding to social and environmental needs. Over the past few decades, we have
seen an amazing growth and success in pharmaceutical sector. With more than 60 years of
expertise in medicine and science, our company draws upon a rich legacy of high-quality
formulations and a robust pipeline of promising generic medicines at affordable price to
meet the health care needs. Since 1954 ACME has been stood for quality, business success
and responsible entrepreneurship. Our heritage and our values are the foundation of our
mission to ensure health, vigor and happiness for mankind.

Beximco Pharmaceuticals Limited

Beximco Pharmaceuticals Limited is a leading manufacturer and exporter of medicines in

Bangladesh. Incorporated in 1976, the Company started its operation by importing
products from Bayer, Germany and Upjohn, USA and selling them in the local market. In
1980, Beximco Pharma began manufacturing of these products under licensing
arrangement and in 1983 launched its own formulation brands. From that humble
beginning, Beximco Pharma has grown from strength to strength. Today, it has become an
emerging global generic pharma company in the region. The Company’s manufacturing
facilities have been accredited by the leading global regulatory authorities, and medicines
manufactured by the Company are now being exported to more than 50 countries including
the highly regulated markets of USA, Europe, Canada and Australia. The Company has
won the National Export (Gold) trophy for 5 times. It remains the only Company in the
country to win the highly prestigious SCRIP Award as the “Best Pharma Company in an
Emerging Market” and also won CPhI Pharma Awards 2020 for “Innovation in Response
to COVID-19.” It also has the unique distinction as the only Bangladeshi Company listed
on the AIM of London Stock Exchange. In 2018, Beximco Pharma acquired majority stake
in Nuvista Pharma (formerly Organon Bangladesh), a leading hormone and steroid
manufacturer in the country. The Company currently employs more than 4,700 employees
including pharmacists, doctors, engineers, chemists, microbiologists, accountants, business
graduates and other white-collar professionals.

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 Chapter Two
(Analysis of the Companies)

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2.1 Markowitz Model

The basic portfolio model was developed by Harry Markowitz (1952, 1959) who derived
the expected rate of return for a portfolio of assets and an expected risk measure. To
analyze return and risk characteristic of the stocks, the monthly mean return and standard
deviation are calculated. And dividend information is incorporated with the monthly
closing price. A single asset or portfolio of assets is considered to be efficient if no other
asset or portfolio of assets offers higher expected return with the same (or lower) risk or
lower risk with the same (or higher) expected return.

2.2 Sharpe’s Single Index Model

William Sharpe (1963) studied Markowitz's research and worked on simplifying the
calculations in order to develop a practical use of the model. There is one key assumption
that makes single index model differentiates from other models used to describe the
covariance structure. The assumption is that E (ej) = 0 for all i and j. This implies that the
stock prices move together and systematically only because of common co-movement with
the market. Besides that, there are no effects beyond the market. Another assumption is the
market index is unrelated to unique return. The basic equation underlying the single index
model is:

Where Ri is expected return on security i; αi is intercept of the straight line or alpha co-
efficient (Constant); βi is slope of straight line or beta co-efficient; Rm is the rate of return
on market index and ei is error term.

Under SIM, ranking of the stocks (from highest to lowest) is done on the basis of their
excess return to beta ratio to construct an optimal portfolio. The excess return is the
difference between the expected return on the stock and the risk-free rate such as the rate
on a Treasury bill (here 5.84% p.a is considered as risk free rate based on the 91 days

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treasury bills rate). For the purpose of analyzing risk characteristic of the stocks, systematic
risk or beta is calculated. Beta measures how sensitive a stock’s return due to its
relationship with the return on the market where in the covariance of the stock i with
the market and is the variance of the market return. To calculate market return DSE
Broad Index data is used.

2.3 Portfolio Performance Evaluation

2.3.1 Sharpe Ratio

Performance has two components, risk and return. A commonly used measure of
performance is the Sharp ratio, which is defined as the portfolio’s risk premium divided by
its risk:

The Sharpe ratio suffers from two limitations. First, it uses total risk as a measure of risk
when only systematic risk is priced. Second, the ratio itself is not informative. To rank
portfolios, the Sharpe ratio of one portfolio must be compared with the Sharpe ratio of
another portfolio. Nonetheless, the ease of computation makes the Sharpe ratio a popular
tool.

2.3.2 Treynor Ratio

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The Treynor ratio is a simple extension of the Sharpe ratio and resolves the Sharpe ratio’s
first limitation by substituting beta risk for total risk. The Treynor ratio is

In addition, the Treynor ratio does not work for negative beta assets-that is, the
denominator must also be positive for obtaining correct estimates and rankings.

2.3.3 Jensen’s Alpha

Like the Treynor ratio, Jensen’s Alpha is based on systematic risk. A portfolio’s systematic
risk is measured by estimating the market model, which is done by regressing the
portfolio’s daily return on the market’s daily return. The difference between the actual
portfolio return and the calculated risk-adjusted return is a measure of the portfolio’s
performance relative to the market portfolio and is called Jensen’s alpha. Jensen’s alpha is
also the vertical distance from the security market line (SML) measuring the excess return
for the same risk as that of the market and is given by

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Alpha<0: the investment has earned too little for its risk (or was too risky for the return)
Alpha=0: the investment has earned a return adequate for the risk taken
Alpha>0: the investment has a return in excess of the reward for the assumed risk

The sign of αp indicates whether the portfolio has outperformed the market. If αp is
positive, then the portfolio has outperformed the market; if αp is negative, then the
portfolio has underperformed the market. Values of αp can be used to rank the performance
of the portfolios.

At first, the three financial models: Markowitz model, Single index model, and Constant
Correlation model are applied to determine an optimal portfolio considering no short-sales
in Dhaka Stock Exchange (DSE) and then the performance of optimal portfolios under
various models is evaluated through Sharp ratio, Treynor ratio, M2, and Jensen’s Alpha.
And finally, the outcomes are compared to find out which one works best than that of
others.

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2.4 Computation of portfolio according to Markowitz Model

2.4.1 Optimal portfolio construction under Markowitz Model

Company Name Items 2015-16 2016-17 2017-18 2018-19 2019-20

Beximco Weight 8.34% 8.96% 9.32% 7.43% 11.23%

E(r) 2.84% 3.29% 3.88% 4.49% 7.31%

SD 18.11% 21.11% 19.54% 24.63% 26.84%

ACI Weight 3.27% 4.20% 4.93% 5.57% 2.26%

E(r) 7.79% 7.21% 2.34% 6.38% 5.62%

SD 19.34% 18.92% 13.37% 27.64% 24.37%

ACME Weight 2.22% 3.32% 4.21% 5.18% 2.21%

E(r) 8.87% 11.21% 13.49% 11.36% 9.27%

SD 37.97% 35.22% 23.79% 22.40% 19.52%

Portfolio return 5.20%

Portfolio risk 4.91%

2.4.2 Determining Cut-off Rate under Single-Index Model (SIM)

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Security (Ri -Rf)/ [(RiRf)*βi]/α2ei [(Ri
-Rf)*β
βi2/α2ei ∑βi2/α2ei Ci
i] /
Name βi α2ei
Beximco 0.1140 0.1317 4.5432 1.1551 35.7599 0.01452
ACI Limited 0.0508 3.3478 21.1446 65.9175 290.1000 0.03728
ACME 0.0634 1.6688 14.8228 26.3377 167.8975 0.03331

2.4.3 Optimal portfolio under Single Index Model

Security Items 2015-16 2016-17 2017-18 2018-19 2019-20
Name
Beximco Weight 3.09% 7.74% 7.11% 4.25% 6.88%
E(r) 5.67% 6.93% 5.72% 6.38% 8.51%

Beta 0.7956 0.4172 0.1357 0.5739 0.3988

ACI Weight 1.99% 1.48% 2.24% 2.15% 1.76%

E(r) 7.79% 8.69% 3.82% 6.42% 7.79%

Beta 1.4113 1.3672 0.8561 1.0441 1.2330

ACME Weight 1.77% 1.26% 1.21% 0.97% 1.13%

E(r) 2.84% 1.79% 2.21% 2.36% 1.94%

Beta 0.1942 0.3841 0.4286 0.2319 14.24
Portfolio return 4.93%
Portfolio risk 4.16%
Beta on a portfolio 0.4486

Alpha on a portfolio 0.0454

2.4.4 Optimal Portfolio Construction under Correlation Model

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 Ri σi (Ri -Rf)/ σi ∑(Ri-Rf)/ σi ρ/ Ci Weight (Xi)
(1ρ+iρ)
Security
Name
Beximco 0.0504 0.1160 0.3804 2.1224 0.1242 0.2636 9.57%
ACI 0.0779 0.1934 0.3706 2.4930 0.1105 0.2754 5.08%
Limited
ACME 0.0567 0.1622 0.3107 4.1262 0.0712 0.2936 1.26%
Beta on a Portfolio, βp 0.6619 Alpha on a Portfolio, αp 0.0491
Portfolio Return 5.49% Portfolio Risk 7.69%

2.5Portfolios Performance Evaluation under various models

2.5.1 Measures of Portfolio Performance Evaluation

Ratios Markowitz SIM CCM Market

Sharpe ratio 0.932994 1.033963 0.631732 0.041964
Treynor ratio 0.071292 0.095945 0.073436 0.002521
Jensen's Alpha 0.044173 0.041909 0.046937 0

Chart Title
1.2

0.8

0.6

0.4

0.2

0
Sharpe ratio Treynor ratio Jenson`s Alpha

Markowitz SIM CCM Market

2.5.2 Ranking of Portfolios by Performance Measure

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 Rank Sharpe ratio Treynor ratio Jensen's Alpha
1 SIM SIM CCM
2 Markowitz CCM Markowitz
3 CCM Markowitz SIM
4 Market Market Market

From above table it can be said that all three portfolios have Sharpe and Treynor ratios greater
than those of the market, and all three portfolios and α i are positive; therefore, investment should
be satisfied with their performance. Among three portfolios, Portfolio under Single index model
performs much better than that of others when total risk is considered (Higher Sharpe ratio). On
the other hand, when systematic risk is used, Treynor ratio is higher for portfolio under SIM
(0.095945) than for others, and Jensen's Alpha is higher for portfolio under CCM (0.046937) than
for others. But Treynor ratio does not work for negative beta assets to obtain correct estimates and
rankings. And all the three companies offer positive beta. That’s why it can be said that Jensen's
Alpha is the best ratio to obtain correct estimates and rankings. And portfolio under Constant
Correlation Model (CCM) has done a better job of generating excess return relative to systematic
risk than others because portfolio under CCM has diversified away more of the nonsystematic
risk than others. And it can also be said that portfolio under CCM outperforms portfolio under
SIM. The results are almost similar to the earlier results.

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 Chapter Three
(Findings and Conclusions)

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3.1 Findings
From the above literature we firmly get some inner outcomes that will help us to access ours
as well as other investors’ portfolio distribution in terms of allocated assets. From the above
calculation we get some points to focus while inviting in several companies.

Rank Sharpe ratio Treynor Jensen's

ratio Alpha
1 SIM SIM CCM
2 Markowitz CCM Markowitz
3 CCM Markowitz SIM
4 Market Market Market

3.2 Conclusion
Risk and return play an important role in making any investment decisions. This study aims at
analyzing the opportunity that are available for investors as per as returns are concerned and the
investment of risk thereof while investing in equity of firms listed in the Dhaka stock exchange.
Three popular models: Markowitz model, Sharpe's single-index model, and Constant Correlation
model were applied by using the monthly closing prices of 238 companies listed in DSE and
DSE.

3.3 References
Affleck-Graves, J. F. & Money, A. H., (1976). ‘A comparison of two portfolio selection
models’, The Investment Analysts Journal, 7(4), pp. 35-40.
Bekhet, H. A. & Matar, A., (2012). ‘Risk-Adjusted Performance: A two-model Approach
Application in Amman Stock Exchange’, International Journal of Business and Social
Science, Vol. 3, No. 7, April, pp.34-45.
Bernard, V. L., (1987). ‘Cross-sectional dependence and problems in inference in market
based accounting research,’ Journal of Accounting Research, Vol. 25, pp. 1–48.
Bowen, P. A., (1984). ‘A hypothesis: Portfolio theory is elegant but useless’, The Investment
Analysts Journal, 24(2), pp. 17-21.
Briec, W. &Kerstens, K., (2009). ‘Multi-horizon Markowitz portfolio performance
appraisals: A general approach’ Omega, 37, pp. 50 – 62.
Chan, L. K. C., Karceski J., and Lakonishok, J., (1999). ‘On Portfolio Optimization:
Forecasting Covariance's and Choosing the Risk Model,’ Review of Financial Studies, Vol.
12, pp. 263-78.

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Dhaka Stock Exchange, http://www.dsebd.org, Dhaka Stock Exchange Library.

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