Table of Contents

Introduction ................................................................................................................................ 1
Study Objective and Methodology ............................................................................................ 1
Data Analysis ............................................................................................................................. 2
Data Analysis: Nafis Iqbal Akil ............................................................................................. 2
Data Analysis: Anika Tahsin.................................................................................................. 5
Data Analysis: Nafisa Nusrat ................................................................................................. 8
Data Analysis: Fatema Khanom ........................................................................................... 11
Data Analysis: Group Portfolio ............................................................................................ 14
Conclusion ............................................................................................................................... 15
Introduction
Financial market is a system that facilitates the transaction of financial securities. In this market
various short-term and long-term securities are traded among issuers, brokers and investors. A
strong and vibrant financial market can boost efficiency and production in the economy by
effectively connecting the supplier of the funds with those who are in need of the fund.

The process of investing in securities requires investors to allocate their capital across broad
types of securities and then select securities from specific issuers and sellers. Careful security
analysis and prudent portfolio management can mean the difference between success and
failure in the investment world. For this reason, estimating return, reducing risk through
diversification and optimal portfolio management became popular especially among risk
averse investors.

To analyze and measure the risk and return level of a given risky security or portfolio, many
statistical models and techniques have emerged like Harry Markowitz’s risky portfolio
selection model and William Sharpe’s simple index model and capital asset pricing model
(CAPM). Although Markowitz’s minimum variance portfolio model was a breakthrough in the
finance world, the model was computationally demanding. This led Sharpe to develop a
simplified model based on simple regression. Sharpe’s CAPM, on the other hand, was a
premier model that takes the sensitivity of an asset towards systematic risk into account and
shows the rate of return that would be required by an investor if the market were efficient. The
required rate of return of an asset is widely compared to actual or predicted return in the real
world to measure the performance and intrinsic value of securities. All these models
emphasized on how firm-specific risk can be eliminated through diversification and also
assisted in identifying a complete portfolio that is optimal for an investor for a given degree of
risk aversion.

Study Objective and Methodology

The objective of this report is to calculate the average return and systematic risk relationship
of 16 securities. First of all we will produce the average return, standard deviation and beta of
individual assets by using simple statistical functions on the sixty month return data and
translate these for a portfolio of four assets and sixteen assets subsequently. Then we construct
a security market line using the risk free rate and expected market return. Finally, we will
evaluate the securities in the light of the security market line.

1
Data Analysis

Data Analysis: Nafis Iqbal Akil

The statistical analysis of sixty month return data of Olympic Industries, Rangpur Dairy &
Food Products, Shaympur Sugar Mills, Zeal Bangla Sugar Mills Ltd is summarized in Table 1.
The analysis showed that ZEAL BANGLA had the highest yearly average return of 44.72%
whereas OLYMPIC had the lowest yearly average return at 1.03%.
Table 1 Statistics of OLYMPIC, RDFOOD, SHYAMPSUG, and ZEAL BANGLA

ZEAL
OLYMPIC RDFOOD SHYAMPSUG
BANGLA
Co-Variance 0.0013 0.0035 0.0050 0.0045
Beta 0.3773 1.0074 1.4370 1.2824
Average Yearly Return 1.03% 6.59% 40.18% 44.72%
Standard deviation 0.7527 1.6976 2.4570 2.3165
Coefficient of Co-Variance 0.0137 0.0388 0.1635 0.1931
Required rate of return 7.51% 10.03% 11.75% 11.13%

Furthermore the coefficient of variation that measures the relative return for the risk, showed
that ZEAL BANGLA had largest coefficient of co-variance (0.1931) which suggests that the
stock had high return for per unit of risk whereas, OLYMPIC had the lowest return for per unit
of risk. The findings also confirmed the complementary relationship between average return
and standard deviation (risk) of these assets as higher return had higher risk associated.

Beta indicates the systematic risk of the asset. Beta of these asset were 0.3773, 1.0074, 1.4370,
and 1.2824. A strong positive correlation (0.8614) between Beta () and average yearly return
was identified. This means that the higher the systematic risk, the higher return and vice versa.
The asset of OLYMPIC had the lowest beta (0.3773). The remaining three stocks had beta
greater than 1 which indicates that their sensitivity to systematic were higher than the market
portfolio.

Annualized return and systematic risk relationship

Figure 1 shows the graphical presentation of the security market line that shows the required
rate of return for these stocks (with a given beta) as well as the portfolio of these asset. The
security market line is based on the capital asset pricing model (CAPM) which says that all
securities that are traded at equilibrium, they will take place on the security market line.

2
 0.50 E(r
Security Market Line
)
0.40

0.30

0.20

0.10

0.00
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6

-0.10

-0.20
AVG. Return Required Rate of return Portfolio

Figure 1: Security Market Line and Average annualized return of OLYMPIC, RDFOOD, SHYAMPSUG, ZEAL BANGLA

From the security market line it can be concluded that the higher the systematic risk, the higher
the required rate of return (see, Table 1 Statistics of OLYMPIC, RDFOOD, SHYAMPSUG, and
ZEAL BANGLA). The predicted average yearly return of these stocks, however, did not lie
within the security market line, which indicates that the securities were not traded at
equilibrium. In this portfolio, two assets like SHYAMPSUG, ZEAL BANGLA located above
the security market line. These assets had a predicted annualized return that were greater than
the return stipulated by the security market line resulting in a positive alpha value. These two
assets were underpriced. Conversely, OLYMPIC, RDFOOD located under the security market
line which indicated that these stocks were overpriced. These assets predicted annualized
returns which were lower than the expected rate of return causing their alpha to be negative.
The value of alpha can be equal, greater than, or less than the zero (0). If it is equal to zero, the
value of asset is fairly priced. On the other hands, if it is greater than or less than the zero, then
we state that the value of asset underpriced or overpriced.
Table 2: Annualized return-systematic risk relationship in equilibrium and disequilibrium situation

Asset CAPM equation Single Index Model equation

OLYMPIC rf + 0.3773 RMarket -0.0648 + rf + 0.3773 RMarket
RDFOOD rf + 1.0074 RMarket -0.344 + rf + 1.0074 RMarket
SHYAMPSUG rf + 1.4370 RMarket 0.2843 + rf + 1.4370 RMarket
ZEAL BANGLA rf + 1.2824 RMarket 0.3359 + rf + 1.2824 RMarket

3
Analysis of Portfolio comprising of OLYMPIC, RDFOOD, SHYAMPSUG, ZEAL
BANGLA

The beta of the portfolio of these 4 stocks was 1.0260 which indicates that the portfolio was
more sensitive towards the systematic risk than the market portfolio. The annualized average
portfolio return was 23.132%. The correlation between the beta of the stocks in the portfolio
and the annualized average return was also very high and positive at 0.8614. The portfolio risk
measured by standard deviation was 1.8059.

The annualized average return and systematic risk relationship of the portfolio in an
equilibrium situation can be explained by the following equation:

E (rportfolio) = rf + 1.0260 RMarket

The required rate of return of the portfolio was 10.1% which was much lower than the predicted
annualized average return and the location portfolio was above the security market line. This
suggests that the portfolio was overvalued. The reason behind this can be explained by the fact
that the portfolio was skewed by two highly underpriced stocks of SHYAMPSUG and ZEAL
BANGLA. Since the market was not efficient, the portfolio had a positive alpha value, and the
annualized average return and systematic risk relationship in the form of an equation was:

E (rportfolio) = 0.1303 + rf + 1.0260 RMarket

4
Data Analysis: Anika Tahsin
The following entails the analysis of sixty-month return data of Shurwid Industries, M.I.
Cement Factory Limited. Singer Bangladesh and Western Marine Shipyard Limited.

The annualized average returns of MICEMENT and WMSHIPYARD were negative at -8.87%
and -18.7% respectively. On the contrary, the annual average return of SHURWID was 13.75%
and SINGERBD was 6.68%, both of which were positive. While the variance of the market
was 0.00349, the covariance of all the stocks were positive (see, Table 3) indicating that these
stocks had a positive contribution towards the volatility of the market portfolio.

Beta is proportional risk contributed by an asset to the market portfolio variance so it is used
to find the commensurate risk premium of an asset. The betas of MICEMENT, SINGERBD,
and WMSHIPYARD were less than 1 which indicates that these assets are relatively less
volatile than the market portfolio. Only, SHURWID had a beta greater than 1 which indicates
that the stock was more sensitive to systematic risk than the market portfolio (see, Table 3).

Table 3 Statistics of SHURWID, MICEMENT, SINGERBD, and WMSHIPYARD

Beta Annualized Standard Coefficient of

average return deviation covariance
SHURWID 1.1424 13.75% 1.817 0.0756
MICEMENT 0.5399 -8.87% 0.822 -0.1079
SINGERBD 0.6586 6.69% 0.935 0.0715
WMSHIPYARD 0.5953 -18.77% 1.168 -0.1606

Annualized return and systematic risk relationship

In order to establish an annualized return and systematic risk relationship, the CAPM model
and the simple index model were used. The CAPM model explained this relationship, based
on the underlying assumption that the securities were traded in equilibrium, whereas the Single
index model explained such for market disequilibrium.

Using the CAPM model and assumptions that the risk-free rate was 6% and market return was
10% a security market line was drawn (see, Figure 2). The annualized return and systematic
risk relationship of the stocks in terms of the risk-free rate and market excess premium are
shown in Table 4.

5
 Table 4 Annualized return-systematic risk relationship in market equilibrium situation

Stocks CAPM equation Required rate of return

SHURWID E (r ) = rf + 1.1424 RMarket 10.57%

MICEMENT E (r ) = rf + 0.5399 RMarket 8.16%

SINGERBD E (r ) = rf + 0.6586 RMarket 8.63%

WMSHIPYARD E (r ) = rf + 0.5953 RMarket 8.38%

0.20 Security Market Line

0.15
0.10
0.05
0.00
-0.05
0.0 0.2 0.4 0.6 0.8 1.0 1.2 
-0.10
-0.15
-0.20
AVG. Return Required Rate of return Portfolio

Figure 2 Security Market Line of SHURWID, MICEMENT, SINGERBD, WMSHIPYARD and Portfolio

The security market line shows the required rate of return of individual stocks with given betas.
The required rate of returns for each stock was compared with their respective annualized
average returns to identify the alpha (see, Table 5) which was the additional positive or
negative return generated from active management of the asset rather than relying on the
passive market index. These alpha values were used to explain the annualized return and
systematic risk relationship of the stocks in market disequilibrium which is shown in Table 5.

Table 5 Annualized return-systematic risk relationship in market disequilibrium situation

Stocks Alpha Single index equation

SHURWID 0.0318 E (r ) = 0.0318 + rf + 1.1424 RMarket

MICEMENT -0.1703 E (r ) = -0.1703 + rf + 0.5399 RMarket

SINGERBD -0.0195 E (r ) = -0.0195 + rf + 0.6586 RMarket

WMSHIPYARD -0.2715 E (r ) = -0.2715 + rf + 0.5953 RMarket

6
Analysis of Portfolio of SHURWID, MICEMENT, SINGERBD, WMSHIPYARD
This portfolio is comprised of the stocks of SHURWID, MICEMENT, SINGERBD, and
WMSHIPYARD. The portfolio had a beta of 0.7341 which suggests that the portfolio risk
premium was less volatile than the market portfolio excess return in response to market risk.
However, the portfolio had a negative annualized average portfolio return of -1.801%. The
correlation between beta and the portfolio return was strong and positive as indicated by its
value of 0.7717. The standard deviation in portfolio return was 1.186. The annualized average
return and systematic risk relationship of the portfolio in an efficient market can be explained
by the following equation:
E (rportfolio) = rf + 0.7341 RMarket

The required rate of return of the portfolio was 8.94% which was higher than the predicted
annualized average return. Thus, the location of the portfolio was below the security market
line and the portfolio was overvalued. In other words, the portfolio did not generate the required
returns for the systematic risk borne by the investors. This might be because the portfolio was
comprised of 3 heavily overpriced stocks which skewed the portfolio’s intrinsic value. The
portfolio had a negative alpha value (-0.1074) and the annualized average return and systematic
risk relationship of the portfolio in market disequilibrium can be presented by the following
equation:
E (rportfolio) = -0.1074 + rf + 0.7341 RMarket

7
Data Analysis: Nafisa Nusrat

In this section, the sixty-month return data of Meghna Cement Limited, M.I. Cement Factory
Limited, GPH Ispat Limited, and Kay & Que limited were elucidated.

All stocks, except KAY&QUE, had negative returns. All stocks had positively contributed to
market variance which is evident from the positive covariance (see, Table 6). The market risk
was 0.0035. The betas of the assets were calculated to identify the volatility of risk premium
in response to systematic risk. The betas of MEGHNACEM and KAY&QUE were 1.122 and
1.077 respectively. Since the beta of the market portfolio is 1, this indicates that these stocks
were more sensitive than the market portfolio towards systematic risk. On the other hand, the
respective betas of MICEMENT and GPHISPAT were 0.539 and 0.781 which suggests that
these stocks were less sensitive towards market portfolio risk.

Table 6 Statistics of MEGHNACEM, MICEMENT, GPHISPAT, and KAY&QUE

Beta Annualized average Covariance

return
MEGHNACEM 1.1217 -7.79% 0.0039
MICEMENT 0.5399 -8.87% 0.0019
GPHISPAT 0.7809 -0.27% 0.0027
KAY&QUE 1.0768 70.73% 0.0038

Annualized return and systematic risk relationship

The annualized return and systematic risk relationship for the efficient market were established
using the CAPM model which is shown in Table 7.

Table 7 Annualized return-systematic risk relationship in market equilibrium situation

Stocks CAPM equation

MEGHNACEM E (r ) = rf + 1.1217 RMarket

MICEMENT E (r ) = rf + 0.5399 RMarket

GPHISPAT E (r ) = rf + 0.7809 RMarket

KAY&QUE E (r ) = rf + 1.0768 RMarket

A security market line was drawn assuming that the risk-free rate was 6% and market return
was 10% (see, Figure 3). This was used to identify the required rate of return for the stocks of
MEGHNACEM, MICEMENT, GPHISPAT, and KAY&QUE were 10.49%, 8.16%, 9.12%,
and 10.31% respectively.

8
 E(r)
0.80 Security Market Line
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00 
0.0 0.2 0.4 0.6 0.8 1.0 1.2
-0.10
-0.20 AVG. Return Required Rate of return Portfolio

Figure 3 Security Market Line of MEGHNACEM, MICEMENT, GPHISPAT, and KAY&QUE

The difference between the annualized average return predicted by the statistical analysis and
the required rate of return can be attributed to market disequilibrium which occurs when stocks
are underpriced or overpriced. The stocks of MEGHNACEM, MICEMENT, and GPHISPAT
were located below the security market line. This indicates that these stocks were overpriced.
On the other hand, the stock of KAY&QUE was underpriced as indicated by its position above
the security market line. When stocks are traded in an inefficient market the relationship
between annualized average return and systematic risk relationship are explained using the
single-index model by adjusting the CAPM equation with an alpha (see, Table 8).

Table 8 Annualized return-systematic risk relationship in market disequilibrium situation

Stocks Single index model equation

MEGHNACEM E (r ) = -0.1828 + rf + 1.1217 RMarket

MICEMENT E (r ) = -0.1703 + rf + 0.5399 RMarket

GPHISPAT E (r ) = -0.0940 + rf + 0.7809 RMarket

KAY&QUE E (r ) = 0.6042 + rf + 1.0768 RMarket

9
Analysis of Portfolio of MEGHNACEM, MICEMENT, GPHISPAT, and KAY&QUE
This section will analyze the average return and systemic risk relationship of a portfolio that
combines the stocks of MEGHNACEM, MICEMENT, GPHISPAT, and KAY&QUE. The beta
of the portfolio was 0.8798 and the annualized average portfolio return was 13.449%. A weak
correlation (0.4811, less than 0.5) was observed between beta and the portfolio return. The
portfolio standard deviation was 1.2510 which indicates its risk. Given that the portfolio traded
in market equilibrium, the relationship between annualized average return and systematic risk
was:

E (rportfolio) = rf + 0.8798 RMarket

The required rate of return of the portfolio was 9.52% which is lower than the predicted
annualized average return. The location of the portfolio was above the security market line so
it was an undervalued portfolio. The portfolio generated more returns than what was required
by the investors in an efficient market. Although the portfolio had 3 overpriced stocks, the
intrinsic value of the portfolio was lowered by one highly underpriced stock of KAY&QUE.
Since the portfolio was undervalued, it was in disequilibrium. So the annualized average return
and systematic risk relationship of the portfolio adjusted for alpha was:

E (rportfolio) = 0.0393 + rf + 0.8798 RMarket

10
Data Analysis: Fatema Khanom
This section analyzes the annualized average return and systemic risk relationship of securities
of LafargeHolcim Bangladesh, Shurwid Industries, M.I. Cement Factory Limited and Rangpur
Dairy & Food Products. Both LHBL, and MICEMENT had negative annualized average
returns of -20.04% and -8.87% respectively. Contrastingly, SHURWID and RDFOOD
had respective positive annualized average returns of 13.75% and 6.59%.

For every unit of risk borne for the stocks of SHURWID and RDFOOD, investors had received
average returns of 0.0756 and 0.0388 respectively as indicated by their coefficient of
covariance. Meanwhile, LHBL had the largest negative coefficient of co-variance (-0.1689)
followed by MICEMENT (-0.1079). Both of these companies belong to the same industry
which might be the reason why their stocks reacted in similar pattern towards risk. Nonetheless,
the stocks of all four companies had positive covariance which implies that these stocks had a
positive contribution to the overall market risk. The variance of the market was 0.00349.

Beta is the sensitivity of an asset to systemic risk. The betas of these assets were calculated as
the covariance of the individual asset divided by the market portfolio variance. LHBL and
MICEMENT had betas that are less than 1 which indicates that these assets were relatively less
sensitive towards systematic risk compared to the market portfolio. Contrarily, SHURWID and
RDFOOD had betas greater than 1 which indicates that these stocks have magnified sensitivity;
so, when systematic risk increases these stocks enjoy risk premiums that are higher than market
risk premium, vice versa. The beta and predicted annualized return of these four stocks are
presented in Table 9.

Table 9 Statistics of LHBL, SHURWID, MICEMENT, and RDFOOD

Annualized Standard Coefficient of

Beta
average return deviation covariance
LHBL 0.7212 -20.04% 1.1865 -0.1689
SHURWID 1.1424 13.75% 1.8177 0.0756
MICEMENT 0.5399 -8.87% 0.8221 -0.1079
RDFOOD 1.0074 6.59% 1.6976 0.0388

Annualized return and systemic risk relationship

The capital asset pricing model can be used to describe the expected annualized return and
systemic risk relationship of an asset that is at market equilibrium. In this model, expected
return is the risk free rate plus the product of beta and market risk premium. The annualized
return-beta relationship of these 4 stocks are presented in Table 10. Assuming that the risk free
rate is 6% and market return is 10%, this relationship has been graphically presented as the
security market line in Figure 4. Along this line, the market risk premium rise by 4% when
beta is increased by 1. The security market line is a powerful tool to evaluate the performance
of an asset because it shows the required rate of return for a given level of beta. The required

11
rate of return on the stocks of LBHL, SHURWID, MICEMENT and RDFOOD are 8.88%,
10.57%, 8.16% and 10.035% respectively.

0.3000
E(r) Security Market Line
0.2000

0.1000

0.0000 
0.0000 0.2000 0.4000 0.6000 0.8000 1.0000 1.2000
-0.1000

-0.2000

-0.3000
AVG. Return Required Rate of return Portfolio

Figure 4 Security Market Line of LHBL, SHURWID, MICEMENT, and RDFOOD

When assets are fairly priced they lie on the security market line. It is evident in Figure 4 that
the stocks of the concerned companies did not lie within the security market line. This indicates
that the stocks were not traded at market equilibrium. SHURWID’s stock lied above
the security market line. This suggests that the asset had a predicted annualized return that was
greater than the return stipulated by the security market line resulting in a positive alpha
value. This suggests that SHURWID’s stock was an underpriced asset. Conversely, the stocks
of LHBL, MICEMENT and RDFOOD lied under the security market line which indicates that
these stocks were overpriced. These assets have predicted annualized returns which were lower
than the required rate of return causing their alpha to be negative.

For this situation, the expected annualized return and systematic risk relationship must be
adjusted with alpha which represents the difference between required rate of return and
predicted rate of return. The alpha of LBHL, SHURWID, MICEMENT and RDFOOD are -
0.289, 0.032, -0.170, -0.034 respectively. The annualized return-systematic risk relationship
adjusted for alpha is presented in Table 10.

Table 10 Annualized return-systematic risk relationship in equilibrium & disequilibrium

situation

Stocks CAPM equation Single index equation

LHBL E (r ) = rf + 0.7212 RMarket E (r ) = -0.289 + rf + 0.7212 RMarket

SHURWID E (r ) = rf + 1.1424 RMarket E (r ) = 0.032 + rf + 1.1424 RMarket

MICEMENT E (r ) = rf + 0.5399 RMarket E (r ) = -0.170 + rf + 0.5399 RMarket

RDFOOD E (r ) = rf + 1.0074 RMarket E (r ) = -0.034 + rf + 1.0074 RMarket

12
Analysis of Portfolio comprising of LBHL, SHURWID, MICEMENT, RDFOOD

The beta of the portfolio comprising of stocks of X was 0.8527 which indicates that the
portfolio was less sensitive towards the systematic risk compared to the market portfolio. The
Portfolio had a negative annualized average return of -2.143% and the risk of the portfolio
measured by standard deviation was 1.3810. A very strong and positive correlation of 0.8367
was found between beta and the portfolio return.

In an efficient market the annualized average return and systematic risk relationship can be
explained by the following equation:

E (rportfolio) = rf + 0.8527 RMarket

From this information, it can be assumed that investors would require a 9.41% return if they
were to invest in this portfolio. However, the predicted annualized average return was much
lower and negative. The location of the portfolio was below the security market line (see,
Figure 4) which suggests that the portfolio was overvalued. The reason behind this can be
explained by the fact that the portfolio was skewed by 3 overpriced stocks of LBHL,
MICEMENT, and RDFOOD. Since the market was not efficient and the portfolio was
concentrated with overpriced stocks, the portfolio had a negative alpha value (-0.1155) so the
equation to describe the annualized average return and systematic risk relationship of the
portfolio is shown below:

E (rportfolio) = -0.1155 + rf + 0.8527 RMarket

13
Data Analysis: Group Portfolio

This section will analyze the average return and systemic risk relationship of all 16 stocks
combined in a portfolio. The portfolio was equally comprised of assets with betas above and
below 1 and the portfolio beta was 0.8732. This indicates that the portfolio was less sensitive
towards the systematic risk compared to the market portfolio. In other words, if the market
excess return increases by 1% the portfolio risk premium will increase by 0.8732%, vice versa.
The annualized average portfolio return was 8.159%. A strong and positive correlation (0.6647,
greater than 0.5) was observed between beta and the portfolio return. The portfolio risk
measured by standard deviation was 1.40.

The annualized average return and systematic risk relationship of the portfolio in an efficient
market can be explained by the following equation:

E (rportfolio) = rf + 0.8732 RMarket

The required rate of return of the portfolio was 9.49%. When compared with the predicted
annualized average return, it was observed that the required rate of return was higher and the
location portfolio was below the security market line. In other words, the portfolio did not
produce commensurate returns for the systematic risk borne by the investors, and the portfolio
was overvalued. The reason behind this can be explained by the fact that the portfolio was
skewed by overpriced stocks; of the 16 stocks in the portfolio, 11 were overpriced stocks. Since
the market was not efficient, the portfolio had a negative alpha value (-0.0133). However, when
compared with portfolios (consisting of four assets) discussed above, this portfolio provided a
return that was closest to the required return in an efficient market. Nonetheless, the annualized
average return and systematic risk relationship of the portfolio when the market is at
disequilibrium can be explained by the following equation:

E (rportfolio) = -0.0133 + rf + 0.8732 RMarket

E(r) Security Market Line

90.00%

70.00%

50.00%

30.00%

10.00%

-10.00% 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6


-30.00%

-50.00% AVG. Return Required Rate of return Portfolio

Figure 5 Security Market Line of the portfolio of 16 stocks

14
Conclusion

Security analysis is an integral part of an investor’s decision-making process. A passive

investor may choose to manage its risky asset portfolio by investing in a market-index portfolio.
However, active investors constantly search the markets for mispriced and increase the weights
of underpriced securities and decrease the weights of overpriced securities to earn additional
returns. This involves estimating the risk and return of risky assets. Investors widely use
historical return data of individual assets and market index to predict return and risk using
sophisticated models like capital asset pricing models or single-index models. The
predictability of these models however strongly depends on statistical factors like the
correlation between systematic risk and the return.

From the analysis of sixty-month return data of 16 stocks the following observations were
made:
 The stocks were highly volatile with large yearly standard deviations
 The portfolio risk (represented by standard deviations) was lower than the risk of the
majority of individual stocks.
 The betas and predicted return had a strong correlation conforming to the positive
relationship between systematic risk and reward.
 All the stocks were mispriced suggesting that the market is in disequilibrium.

All the stocks analyzed earlier were traded in the financial market of Bangladesh. It is argued
that the security market of the country is still at an infant stage despite being in operation for
over seven decades. Various factors such as lack of diversity of securities, weak regulatory
regime, scarcity of competent intermediaries, and rampant corporate malpractice have stunted
the growth of this market. To nurture a strong and vibrant financial market, the country needs
sound policies and techniques that will facilitate the investment process and boost investors’
confidence.

15