An Assignment

on
Management Science

Title: “Comparative analysis of risk of returns for a portfolio of 3 listed

Footwear companies of DSE with Indian Footwear companies”

Submitted To:
Dr. Md Sharif Hossain
Professor
Department of Accounting & Information Systems
University of Dhaka

Submitted By:
Sadat Hasan
Id: 23106
Section: B
Batch: 23rd

Date of submission: 13th March, 2021

 Comparative analysis of risk of returns for a portfolio of 3 listed Footwear
companies of DSE with Indian Footwear companies.
Executive summary
In this study we examine the impact of portfolio among listed companies of Dhaka Stock
Exchange (DSE) and Bombay Stock Exchange (BSE). We examine return for the companies and
portfolio risk is determined using those returns. For this study we have been used 10 years data
from 2011-2020 stock returns of 3 footwear companies from DSE and 3 Footwear companies
from Bombay stock exchange. In order to examine the risk and return relationship we apply the
portfolio analysis for two countries Footwear companies.
From the empirical analysis we have been found that there is a relationship with the risk and
portfolio. We found that if we increase securities in portfolio then risk will be minimum. That
means if we invest in 3 companies at a time than 2 companies then the effect of portfolio risk
will be decreased. Moreover, investors need to be prudent in this case to invest more than one
companies to minimizing their risks because every company cannot do well at the same period
of time. In this case investing in single company is not wise because there is a possibility to face
a huge loss. So, it is wise to invest in more than one company which is tend to be profitable.
1.0 Introduction
Stock market is a very important factor in an economy. A healthy and fit stock market helps an
economy to grow well. It also helps to improve the GDP growth. Many people in our country
and throughout the world depends on stock market. Through this stock markets companies get
an opportunity to collect capital and by utilizing this properly companies can expand their
business and make the capital providers happy through paying dividend and interest. Thus
Company can contribute to the economy by providing qualitiful goods, jobs, paying taxes and
other social welfare activities. But stock market is not always a profit making factory. Here loss
can also be happen. In that case some people can loss all of their savings. As warren Buffett
once said that “do not put all your eggs in a basket “is trues in case of investment. To minimize
the loss in 1952 Harry Markowitz come with a new theory which is known as portfolio.
Portfolio is framework by which an investors can assemble his assets in such a way that can
minimize the expected return. It is a collection of financial investments like stocks, bonds,
commodities, cash, and cash equivalents, including closed-end funds and exchange traded
funds (ETFs). But the general believe is that stock bond options warrant are the core of
portfolio. Through this theory it is found that if we invest in a single asset there is a higher
probability to make a loss. But by diversifying our assets we can minimize the expected return.
If an investor invests in a single stock then if the price falls he will loss all of his savings. But if
that person prudently invests in more stocks then there is a probability that some stock may
face loss. But others will be profitable for that investors. This profitable investment can
compensate his loss. Therefore there is less chance to be bankrupt in that case.
Most investment analysts agreed that though it is not sure that portfolio will wholly reduce the
risks of investment it will decrease the risks for both long- and short-term period. It is prudent
to analyze a securities return and then invest in it. There are basically four types of portfolio
according to the investment analysts. They are;

 A Hybrid Portfolio
 A Portfolio Investment
 An Aggressive, Equities-Focused Portfolio
 Defensive, Equities-Focused Portfolio

A hybrid portfolio approach diversifies across asset classes. Building a hybrid portfolio requires
taking positions in stocks as well as bonds, commodities, real estate, and even art. Generally, a
hybrid portfolio entails relatively fixed proportions of stocks, bonds, and alternative
investments. When you use a portfolio for investment purposes, you expect that the stock,
bond, or another financial asset will earn a return or grow in value over time, or both that is
portfolio investment. Aggressive investors seek out companies that are in the early stages of
their growth and have a unique value proposition. A portfolio that is defensive would tend to
focus on consumer staples that are impervious to downturns (Carla tardi, Investopedia, 2021,
Types of portfolio” section).
A portfolio's asset allocation may be managed utilizing any of the following investment
approaches and principles: dividend weighting, equal weighting, capitalization-weighting, price-
weighting, risk parity, the capital asset pricing model, arbitrage pricing theory, the Jensen Index,
the Treynor ratio, the Sharpe diagonal (or index) model, the value at risk model, modern
portfolio theory and others (“portfolio finance”,nd)
In this research we take capitalization weight and price return to measure the portfolio risk.
Return will be calculated with 10 years data from 2011-2020 of 3 footwear companies of Dhaka
stock exchange and 3 footwear companies from Bombay stock exchange. Firstly 2 companies’
portfolio will be measured and after that 3 companies portfolio will be determined and the
impact of increasing portfolio will be described throughout the paper.

2.0 Literature review

As Portfolio theory has been developed many years back, there are many research about this
portfolio theory. This portfolio theory has been developed by Harry Markowitz in 1952. It was
mainly developed to minimize the risk. There are many researchers who research to determine
the usefulness of portfolio in many circumstances. Still there are some gaps related to the
portfolio theory.
The main goal of the portfolio managers is to get the highest return in the market. Risk is linked
with the future outcomes, while the future is unpredictable because it is influenced from the
choices that are not yet completed (Soros, 2003).

If manager wants, they can reduce the unsystematic risk to some extent, but not the
systematic. Because systematic risk is that kind of risks that cannot be diversified by portfolio.
Systematic risk occurs basically from some uncontrollable and outer force outside of the
company. Beta in the stocks is telling us only how much sensitive the security is to systematic
risk. The capital asset pricing model (CAPM) built by Sharpe (1964) and Lintner (1965)
differentiate extent of risk premium above the market risk and the range of the enterprise risk
that should be hedged (Ray, 2010).

When we construct a portfolio, we make the portfolio with different sort of securities because
portfolio optimization and risk are lower due to the mix. Portfolio analysts of a company
analyze both the diversifiable and non-diversifiable risk. Investors tend to benefit from
diversification when investing not only within national borders, but also extending the scope of
the investment horizon beyond national markets (Khan, 2011). However, stock markets are
highly correlated over the world that means international diversification is no longer provides
portfolio optimization advantage.

It is also known that every security has its own risk. An investor can get higher return from
common stock as well as higher risk than the bondholder and preferred shareholder. As the
common stockholders don’t get a fixed amount of profit all time and loss has also to be borne
by them the risk of common stockholders is higher. AS we know higher risk comes into higher
return. But every share does not bear same amount of risk, as these risks also depend on many
internal factors of a company. These factors are known as non-systematic risk.

Non-systematic risk can be eliminated through the better arrangement of the portfolio
securities while market risk is the shock that comes from the market crisis. Systematic shocks
are beyond the scope of the managers to control those (Olibe et al. 2007). As time passes by,
people are getting more and more interested in portfolio mix as it decreases the risk of the
return. Because number of securities in a portfolio is a pivotal element in risk reduction.

In addition, a number of studies confirm that a portfolio with more than 50 uncorrelated stocks,
fully completes risk reduction in the portfolio (Copp & Cleary, 1999; Domain et al., 2007). The
large number of stocks held in the portfolio of equity funds is unjustified, since a portfolio with
5 to 16 stocks can eliminate unsystematic risk (Evans & Archer, 1968; Jannings, 1971;). A low
number of securities within the portfolio delivers a higher correlation coefficient which
increases the risk exposure (Tola et al. 2008; De Miguel et al. 2013).
According to all literature it is found that there are many research related to reducing the risk.
Some papers are found to prove that increasing the number of securities can eliminate the
unsystematic risk. But there are many factors which have impact on portfolio has not yet been
discussed. Portfolio risk management is mainly measured by correlation coefficients, weights of
each security in the portfolio, and the variance of returns. All of these factors are great
influencer to increase or decrease the portfolio risk. If the weight of the particular securities is
high and the variance is higher than normal then the risk exposure of unsystematic risk is also
getting higher.

Through this paper it will be discussed that size of a firm can help to minimize the risk of a
portfolio and make the portfolio a better one. In this purpose market capitalization has to be
taken to determine the weight of a company and based on this weight how portfolio reacts in
our country and internationally will be discussed.

3.0 Data collection and Descriptive statistics

To conduct the research we have needed data. These data have been collected from many
sources. The research is mainly based on secondary data. This secondary data has been
collected from companies’ financial statements. To calculate return we need price of the share
of last 10 years. These 10 years data 2011-2020 has been collected from:
i. Dhaka stock exchange (DSE)
ii. Lanka-Bangla finance portal
iii. Yahoo finance
We calculate return from the beginning and ending close price of these companies. From return
we calculate expected return and standard deviation. Then we took market capitalization as the
weighting factor for the company. These weighting factor has been collected from the Dhaka
stock exchange and Bombay stock Exchange. From these we can calculate portfolio mean,
portfolio variance and portfolio standard deviation.

Here is the price and return of 3 footwear companies of Bangladesh enlisted in DSE are given
below:

BATA shoe Company (Bangladesh) Ltd:

Years Beginning close Price Ending close Price Return

2011 673.2 598.5 -0.110962567
2012 602.8 535.7 -0.111313869
2013 523.3 690 0.318555322
2014 705 1172.1 0.662553191
2015 1165 1317.7 0.131072961
2016 1318.1 1142 -0.133601396
2017 1152 1171.8 0.0171875
2018 1168.3 1116.4 -0.044423521
2019 116.4 696.1 4.98024055
2020 703.9 702.7 -0.001704788

Apex Footwear Ltd:

Years Beginning close Price Ending close Price Return

2011 4077 295.6 -0.927495708
2012 301.4 231.1 -0.233244857
2013 232.9 412.1 0.769428939
2014 435.7 443.5 0.017902226
2015 443.1 347.2 -0.2164297
2016 343.3 330.3 -0.037867754
2017 342.8 328.6 -0.041423571
2018 324 295.5 -0.087962963
2019 295.5 223.1 -0.24500846
2020 222.8 220.3 -0.011220826
 Years Beginning close Price Ending close Price Return
2011 54.6 40.1 -0.265567766
2012 39.8 21.1 -0.469849246
2013 21.1 43 1.037914692
2014 41.6 27.3 -0.34375
2015 27.1 30.4 0.121771218
2016 31.4 23 -0.267515924
2017 23.5 56.1 1.387234043
2018 57.5 189.8 2.300869565
2019 189.8 62.3 -0.671759747
2020 63 62.9 -0.001587302
Legacy Footwear Ltd:

The expected return and standard deviation from the return are given below:

Company Name Expected return Standard deviation

Bata 0.570760338 1.568707
Apex -0.101332267 0.411258
Legacy 0.282775953 0.968571

Now we calculate the portfolio risk for 2 companies. Here is the weighting factor for Bata and
Legacy are given below:

Company Name Market Capitalization (In million) Weight

BATA shoe Company (Bangladesh)
Ltd 9,482.98 0.920167437
Legacy Footwear Ltd 822.731 0.079832563

Variance covariance matrix for 2 companies:

BATA Legacy
BATA 2.214758121 -0.480151423
Legacy -0.480151423 0.844316885

From these data Portfolio mean, variance and standard deviation has been given below:

Portfolio mean 0.547769807

Portfolio Variance 1.810091501
Portfolio std. Deviation 1.34539641
Now we calculate the portfolio risk for 3 companies. Here is the weighting factor for Bata, Apex
and Legacy are given below:

Company Name Market Capitalization (In million) Weight

Bata 9,482.98 0.742433315
Legacy 822.731 0.064412575
Apex 2,467.13 0.19315411

Variance covariance matrix for 3 companies are given below:

BATA Legacy Apex

BATA 2.214758121 -0.48015 -0.02761
Legacy -0.48015142 0.844317 0.132342
Apex -0.02760832 0.132342 0.152219

From these data Portfolio mean, variance and standard deviation has been given below:

Portfolio mean 0.422393073

Portfolio Variance 1.179423961
Portfolio std. Deviation 1.086012873

Here is the price and return of 3 footwear companies of Bangladesh enlisted in Bombay Stock
Exchange are given below:
BATA India Ltd.

Years Opening price Closing Price Return

2011 157.77 265.23 0.681118083
2012 265.2 433.48 0.63453997
2013 437.05 528.28 0.208740419
2014 534.08 652.85 0.222382415
2015 649.53 521.4 -0.197265715
2016 516.9 448.3 -0.132714258
2017 447.6 747 0.668900804
2018 753.45 1133.4 0.504280311
2019 1127.35 1750.7 0.552933871
2020 1745.6 1578.85 -0.095525894

Years Opening price Closing Price Return

 2011 19.17 11.98 -0.375065206
2012 11.76 40.19 2.417517007
2013 40.2 56.75 0.411691542
2014 56.34 140.98 1.502307419
2015 144.45 254.25 0.760124611
2016 253.4 200.93 -0.207063931
2017 203.18 337.8 0.662565213
2018 342.13 367.15 0.073130097
2019 368.45 615.5 0.670511603
2020 615.35 811.2 0.318274153
Relaxo Footwears Ltd.

Mirza International Ltd.

Years Opening price Closing Price Return

2011 24.1 16.6 -0.31120332
2012 17.45 24.55 0.406876791
2013 24.8 29.8 0.201612903
2014 29.95 43.05 0.437395659
2015 43 132.6 2.08372093
2016 133 85.2 -0.359398496
2017 86.7 158.95 0.833333333
2018 160.65 83.25 -0.481792717
2019 82.65 56.6 -0.315184513
2020 56.95 57.05 0.001755926

The expected return and standard deviation from the return are given below:

Company Name Expected return Standard deviation

Bata India 0.304739001 0.350245
Relaxo 0.623399251 0.826042
Mirza 0.24971165 0.772282

Now we calculate the portfolio risk for 2 companies. Here is the weighting factor for Mirza and
Relaxo are given below:
 Company Name Market Capitalization (in billion) Weight
Mirza International Ltd. 6.587 0.030645762
Relaxo Footwears Ltd. 208.353 0.969354238

Variance covariance matrix for 2 companies are given below:

  Mirza Relaxo
Mirza 0.536777309 0.224819177
Relaxo 0.224819177 0.614110345

From these data Portfolio mean, variance and standard deviation has been given below:

Portfolio mean 0.61194731

Portfolio Variance 0.590908683
Portfolio std. Deviation 0.76870585

Now we calculate the portfolio risk for 3 companies. Here is the weighting factor for Mirza,
Relaxo & BATA are given below:

Company name Market Capitalization (in billion) Weight

Mirza International Ltd. 6.587 0.016031406
Relaxo Footwears Ltd. 208.353 0.507088427
BATA India Ltd. 195.941 0.476880167

Variance covariance matrix for 3 companies are given below:

  Mirza Relaxo Bata

Mirza 0.536777309 0.224819 -0.07987
Relaxo 0.224819177 0.61411 0.049678
Bata -0.07987361 0.049678 0.110405

From these data Portfolio mean, variance and standard deviation has been given below:

Portfolio mean 0.46544576

Portfolio Variance 0.209617275
Portfolio std. Deviation 0.457839792

4.0 Methodology and Empirical Analysis

Here we will determine the risk of tannery industry in Bangladesh and tannery industry of India.
For this purpose we will take 3 companies as a sample from both companies. 3 footwear
companies 10 years data has been collected from 2011-2020 from both countries. We will
make a portfolio of 2 footwear companies. Then the weighting factors has been measured. This
weighting factor has been calculated by using the market capitalization. And through the
research it has been found that weighting factor has significant impact on the portfolio. If same
weighting factor has been taken then the portfolio deviation has been changed significantly.

In this study we conduct 2 step portfolio deviation. First step is to conduct the risk analysis with
2 companies from both Dhaka stock exchange enlisted company and Bombay stock exchange
enlisted company. After that in the second step we take three companies from both Dhaka
stock exchange enlisted company and Bombay stock exchange enlisted company. With this
steps we find that portfolio risk has been decreased by the increasing amount of securities in
decision.

We took beginning close price and ending close price of the companies to calculate return and
expected return. Then we calculate the standard deviation. It ensures us to know the individual
risks of the company’s securities. We also calculate the weighting factor of the companies. For
this we take the market capitalization of the companies. Next, we calculate the portfolio mean,
covariance and standard deviation of the companies. Formulas we used in paper are given
below;
1. Return: (Ending close price- Beginning close price)/Beginning close price
2. Expected return: ∑r/n
3. Standard deviation: √∑(x−μ)2/(n-1)
4. Weight: Market capitalization of company A/(Market capitalization of
company A+ Market capitalization of company B)
5. Variance σ=∑ (r1-r bar)/(n-1)
6. Portfolio, σ2p=w12 σ12+ w22 σ22+ w32 σ32+2σ1,2 w1w2+2σ1,3 w1w3+2σ2,3 w2w3
7. σp =√ σ2
8. Portfolio return=∑wi ri
Through all these formula portfolio risk has been determined. As many researcher has found
that increasing securities can minimize the portfolio risk we also determined this throughout
our research. But the most significant fact is the weighting factor. This weighting factor has
been determined through market capitalization. It is not always the truth that increasing the
number of securities can only be the way to minimize risk. It is also a fact that if we put a
security of small weight in a portfolio it has a very insignificant impact in the portfolio.
Firstly we take two securities from Bangladesh. Bata and legacy Footwear Company. In Bata the
standard deviation is 1.568 and the Legacy standard deviation is 0.968. Here Bata holds
maximum market share that means Bata has a high weighting factor of approximately 92%. So
the portfolio risk is mostly dependent on Bata Shoe Company’s return. That is why the portfolio
standard deviation of Bata and Legacy is 1.34539641.
It is a matter of concern that if Bata company’s market capitalization will not be the same then
what will happen. For this purpose we take equal weight for Both Bata and Legacy Company. So
the both weighting factor is 0.50. Taking equal weight for both companies the following has
been found:

Portfolio mean 0.426768146

Portfolio Variance 0.52469304
Portfolio std. Deviation 0.724356984

Previously the portfolio standard deviation was 1.3454 with actual market capitalization where
Bata has a huge amount of market capital which leads them to gain more weight in calculation.
But if the portfolio has been made with other company or if the Legacy has equal market
weight same as Bata then the portfolio standard deviation will be 0.724.
It has been noticed that same level of companies can significantly reduce the risk. Here with
same weighting factor the portfolio standard deviation has become significantly low from
1.3454 to 0.724.
For further proving of this matter we take another portfolio from abroad. We take a portfolio
from Bombay stock exchange footwear Companies. Relaxo and Mirza has been taken for this
proving. Relaxo has a higher market capital comparative to Mirza Footwear Company. Relaxo
has approximately 96% market capitalization comparative to Mirza Footwear Company. With
the actual weight regarding to the market capitalization the portfolio standard deviation is
0.7687. Here only Relaxo Footwear Company has individual standard deviation was 0.82.
So we can see that the portfolio standard deviation mostly reflects a company with higher
weight. If we now take the equal weight for both companies than what will happen with this
risk. By taking equal weight of both Relaxo and mirza Footwear Company for both the result of
portfolio has been given below:

Portfolio mean 0.43655545

0.40013150
Portfolio Variance 2
0.63255948
Portfolio std. Deviation 5

Here we can again see that with equal weight of market capitalization the portfolio standard
deviation has been reduced significantly. Here we take .50 market weight for both Relaxo and
Mirza Footwear Company. For that reason portfolio Standard deviation has become 0.6325
which was in case of actual weight of market capitalization was 0.7687. Here also a major
impact has been noticed in terms of changing the weighting factor in a portfolio analysis.
5.0 Conclusion

In this world of business portfolio theory has a major impact in all aspects of business. Though
this portfolio theory has been introduced long ago in 1952 by Harry Markowitz, in the present
world the importance of this theory is undeniable. Managers can use this theory to take
decision of business. Investors can also be benefitted from this portfolio theory by investing in
different securities. It helps everybody to reduce the risk.

According to Warren Buffet, “Don’t put all eggs in one bucket.” By this statement Warren Buffet
tries to tell that a person should invest his/ her money in many securities rather than one single
securities. If a person spends all of his investment in one securities, there is a possibility to loss
all of his investment and that person become bankrupt as well. If that person invests in more
than one securities than there is a less possibility of failure.

Through our paper it has been analyzed that increasing number of securities can minimize the
risk. It is not like that this statement is true in only our country. This statement is true for the
world. For that reason we take International companies as well and analyze the behavior of risk
of India footwear companies. It is also found that risk of Indian Footwear companies reacts in
the same direction like ours. In both countries portfolio standard deviation has been reduced by
increasing number of companies.

Another and most important thing is found throughout this paper is the impact of size/
weighting factor in portfolio. If a portfolio is made with a company which higher weighting
factor than the whole portfolio goes toward the direction of the individual Company which has
a higher weighting factor. If we take companies of equal weighting factor than the risk reacts to
every securities of that portfolio equally.

So it is suggested that investors should use portfolio technique in their investment decision. But
it should also me remember the investors that they should make their investment portfolio
wisely. Because a company which has huge return have major impact on the portfolio. If the
portfolio has been made with minor companies with insignificant return then the risk will not
be significantly minimized. For these reasons the investors should make portfolio which are
closely equal weight. Thus the risk can be minimized significantly.
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