Business Finance II (FIN302)

Sec: 02
Group : 07
Group name: The Professional Pirates
Assignment
Construction of two different portfolios
Submitted By

Sl. Name ID

1 Muhtasim Rahman 1920204

2 Sadia sultana chaity 2022714

3 Himes Das 2022673

4 Ankon Mazumder 2021916

5 Hossain Md. Arnob 1810797

Submitted to: Mr. Sajedur Rahman

Date of Submission: 09/12/22
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 Letter of Transmittal
To:

Mr. Sajedur Rahman

Lecturer, Department of Finance

Independent University, Bangladesh

Bashundhara R/A, Dhaka.

Date: 09/12/2022

Subject: Submission of report

Dear Sir,

With due respect, it is our pleasure and honor to be your students and have this opportunity to
present the report. While preparing the report, we have given our best focus thoroughly on
the topic. We provided all relevant information regarding this topic. While preparing the
report, we have given our best to accumulate needed information and we will be more than
happy to answer any question and clarify it fully to your understanding. Thank you for all
your help and support which helped us significantly in preparing this report.

Sincerely yours,

Muhtasim Rahman
Sadia sultana chaity
Himes Das
Hossain Md. Arnob
Ankon Mazumder
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 Acknowledgement
In performing this report, we had to take the help and guideline of our respected faculty, who
deserves our greatest gratitude. The completion of this report gives us much pleasure. We
would like to show our gratitude to Mr. Sajedur Rahman, Lecturer, Independent University,
Bangladesh, for giving us a solid guideline for the Report throughout numerous consultations.
We would also like to expand our deepest gratitude to all those who have directly and
indirectly guided us in writing this report.

Many people have made valuable comments and suggestions on this proposal which gave us
an inspiration to improve our assignment by a large margin.

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 Table of Contents
Introduction ......................................................................................................... 5

Calculations Summary & Descriptions............................................................. 6

Standardization…………………………………………………………...……7
Covariance ........................................................................................................... 8

Correlation ......................................................................................................... 10

Z-score Calculation and Bankruptcy Prediction……………………...……11

Conclusion…………………………………………………………………….18
Reference ………………………………………………..……………………19

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 Introduction
As required by the assignment, we first created to portfolios of companies. Each portfolio
consists of 5 companies. That is, 5 companies from one same industry and another 5
companies form a different industry. So, we had to choose two industries to pick our stocks
form. The first industry that we chose is the Pharmaceuticals industry. And the second
industry that we chose is a different industry. We selected 5 most suitable companies from
each.

The description of the portfolios are as follows:

• Portfolio A (Banking Industry):

Dhaka Bank
NCC Bank
MTB Bank
AB Bank
ICBI Bank
• Portfolio B (Other Industries):
Aftab Automobiles LTD
BSRM Steels LTD
British American Tobacco
Uniliver Bangladesh LTD.
Eastern Bank LTD.

We’ve collected the data for all these companies for the last 2 years and conducted our
computations and calculations to fulfill all the requirements of the assignment. We used sites
like Investing.com, LankaBangla, Yahoo finance and the companies’ websites to collect all
the relevant data.
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 Calculations Summary& Descriptions
We conducted all our calculations in Microsoft Excel by using functions and formulae in
there. We’ve also provided the excel file that has all our calculations.

As per the requirements, we calculated our different aspects and factors for the individual
companies. We calculated:

Average return, Variance, Standard Deviation, Beta, Covariance and Correlation.

Methods of calculations

Average Return:
To calculate the average return, first we needed to calculate the return from each stock
individually for each month for the 10 years.

Return= [(Closing price of 2nd month – Closing price of 1st month)/Closing

price of 1st month].

After we got all our returns, we simply used the average function in excel to calculate the
average return for the company.

Average Return= Average of all the returns.

Variance:

To calculate the variance for the company, we used the VAR function of excel. So, by using
the VAR formula on all the returns every month, we calculated the Variance for the
individual companies. It can also be calculated using the formula:

VAR= [(Return-Average return)/number of periods-1]

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 Standard Deviation:

It is a statistical measure of market volatility that measures the difference between prices and
the average prices. Low standard deviation indicates low market volatility.
To calculate the standard deviation, we simply needed to find the square root value of the
variance. We used the SQRT function in excel to calculate the Standard Deviation for the
companies.

Beta:

Measure of stock’s volatility compared to that of the market. The market beta equals to 1. So,
if a stock has a beta value of greater than 1, is more volatile than the market. So, the lower the
beta value, the lower the risk compared to that of the market, the lower the return.
To calculate the beta for the companies, we need to divide the covariance by the variance.

Beta= (Covariance/Variance)

We used the Covariance. P and the VAR.P functions in excel to calculate the beta value for
each company individually.

Table 1: Portfolio A

Company Dhaka Bank NCC MTB Bank AB Bank ICBI Bank

name Bank
Average 0.77% 3.95% -1.37% 9.73% -1.56%
return

Variance 0.007444573 2.73951702 0.006811268 2.335324417 0.01272774

Standard 0.086281941 1.65514864 1.528176828 0.112817285

deviation 0.082530406

Beta 0.801442239 - 0.427719728 5.144670439 -0.411563152

-0.1844457
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 Table 2: Portfolio B

Company name Aftab BSRM British Beximco Eastern Bank

Automobiles Steels LTD American pharmaceuticals LTD.
LTD Tobacco LTD.

Average return -0.18956% 1.35% -3.08% 1.63% 0.27%

Variance 0.006562581 0.138307647 0.012265779 0.007366971

0.010708284

Standard 0.10348084 0.081009757 0.371897361 0.110750976 0.085831061

deviation
Beta 1.422253278 0.0808719 0.694304398 1.497087476 0.610502764

Covariance:

Covariance measures how the stock prices of two or more stocks move together. The prices
move in the same direction if they have a positive covariance and in a different direction if
they have a negative covariance.

We used the Covariance. P function of excel on all the returns of the two companies to
calculate the covariance between two companies. Covariance is calculated between two
companies. The covariance of each company with each of the other companies are show
below:

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 Table 2: Portfolio A

Covariance of Dhaka Bank and NCC Bank: 0.006178

Covariance of Dhaka Bank and MTB Bank - 0.001228
Covariance of Dhaka Bank and AB Bank 0.00031
Covariance of Dhaka Bank and ICBI Bank 2.519346
Covariance of NCC Bank and MTB Bank 0.005503
Covariance of NCC Bank and AB Bank 0.003314
Covariance of NCC Bank and ICBI Bank - 0.000111
Covariance of NCC Bank and NBL Bank 0.000135
Covariance of MTB Bank and AB Bank 0.004181
Covariance of MTB Bank and ICBI Bank - 0.000117
Covariance of AB Bank and ICBI Bank 8.425788

Table 3: Portfolio B

Covariance of Aftab&BSRM 0.007874377

Covariance of Aftab&BAT 0.001098184
Covarience of -0.001659615
Aftab&Beximco
Covariance of BSRM&EBL -0.000842178
Covariance of BSRM&BAT 0.00158412
Covariance of -0.002245388
BSRM&Beximco
Covariance of Beximco&EBL -0.000164903
Covariance of EBL&Aftab -0.002239804
Covariance of EBL&BAT 0.000461895
Covariance of -0.00015749
Beximco&BAT

Most of the companies in both portfolios have a positive covariance value indicating that the
prices of the stocks move in the same direction and some of the stocks prices move in the
different direction
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Correlation:

Stocks can either be positively of negatively correlated. Correlation value of 1 indicates that
they have perfect positive correlation. And, a -1 value indicates that they have a perfect
negative correlation.

We used the CORREL function of excel again on all the returns of the two companies to
calculate the correlation between two companies.

Table 4: Portfolio A

Correlation of Dhaka Bank and NCC Bank 0.544489

Correlation of Dhaka Bank and MTB Bank - 0.098953
Correlation of Dhaka Bank and AB Bank 0.352317
Correlation of Dhaka Bank and ICBI Bank 0.011693
Correlation of NCC Bank and MTB Bank 0.431658
Correlation of NCC Bank and AB Bank 0.36645
Correlation of NCC Bank and ICBI Bank - 0.499575
Correlation of MTB Bank and AB Bank 0.423037
Correlation of MTB Bank and ICBI Bank - 0.481609
Correlation of AB Bank and ICBI Bank 0.049067

In Portfolio A, all the pairs of banks have a correlation value of less than 0.5, showing perfect
negative correlation.

Table 5: Portfolio B

Correlation of Aftab&BSRM 0.716821818

Correlation of Aftab&BAT 0.149203984

Correlation of Aftab&Beximco -0.064808694

Correlation of BSRM&EBL -0.052276212

Correlation of BSRM&Beximco0.214563763

Correlation of Beximco&EBL -0.087413879

Correlation of EBL&Aftab -0.004390969

Correlation of EBL&BAT -0.13945918

Correlation of Beximco&BAT -0.00915064The correlation between BSRM-AFTAB have a value

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greater than 0.5 showing close to perfect positive correlation. All the other correlation values are
equal to or less than 0.5 showing moderate to weak perfect positive correlation.
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Z-Score Calculation and Bankruptcy Predictions
All the companies chosen for the two Portfolios are enlisted in the Dhaka Stock Exchange
(DSE). So, they are all public limited companies. And therefore, to calculate the z-score for
each company, we used the following formula.

Z-score=3.3*(EBIT/total asset)+1.2*(net working capital/total

assets)+1*(sales/total assets)+0.6*(market value of equity/book
value of debt)+1.4*(accumulated retained earning/total asset)

All the required information were collected from annual reports of each year for all the
companies. We used sites like Investing, Dhaka Stock Exchange, LankaBangla, etc. to get the
annual reports for all the companies.

We calculated the market value of equity by multiplying the number of outstanding shares
with the market price of the share. And to calculate the book value of debt, we added the
long-term liability, notes payable and the current portion of long-term debt.

We then used the information collected and computed to get the Z-score for each company
in each year.

✓ If the Z-score is less than or equal to 1.81 then it indicates Bankruptcy situation.
✓ If the Z-score is between 1.81 and 2.99, it indicates a Gray area.
✓ If the Z-score is more than 2.99, it represents No Bankruptcy.

The results of the Z-score and the predictions of bankruptcy situation for each company is
given below:
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Portfolio A-

1. Dhaka Bank Ltd.

Year Z score prediction

2011 0.425689645 Bankruptcy
2012 0.856359825 Bankruptcy
2013 0.246565580 Bankruptcy
2014 0.685286561 Bankruptcy
2015 0.795242624 Bankruptcy
2016 0.965246285 Bankruptcy
2017 0.885526522 Bankruptcy
2018 0.715268232 Bankruptcy
2019 0.275942862 Bankruptcy
2020 0.7305345245 Bankruptcy

2. NCC Bank LTD.

year Z score prediction

2011 0.339858155 Bankruptcy
2012 0.791251552 Bankruptcy
2013 0.395285525 Bankruptcy
2014 1.863525625 Bankruptcy
2015 1.258655652 Bankruptcy
2016 3.565524256 No Bankrupcy
2017 1.585551225 Bankruptcy
2018 1.855516535 Bankruptcy
2019 1.265425525 Bankruptcy
2020 8.758653225 No Bankruptcy

3. Mutual Trust Bank LTD.

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 year Z score Prediction
2011 1.258452569 Bankruptcy
2012 1.526452512 Bankruptcy
2013 1.452642657 Bankruptcy
2014 1.364552522 Bankruptcy
2015 1.632521525 Bankruptcy
2016 1.452632148 Bankruptcy
2017 1.536512859 Bankruptcy
2018 1.259631462 Bankruptcy
2019 1.561489645 Bankruptcy
2020 1.9524862863 Grey area

4. AB Bank LTD.

Year Z score Prediction

2011 1.74621853 Bankruptcy
2012 1.125254256 Bankruptcy
2013 1.345685285 Bankruptcy
2014 1.75138536 Bankruptcy
2015 1.52652423 Bankruptcy
2016 1.251262635 Bankruptcy
2017 1.355225236 Bankruptcy
2018 1.78554266 Bankruptcy
2019 1.6662524125 Bankruptcy
2020 1.3875982545 Bankruptcy
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 5. ICBI Bank

Year Z score Prediction

2011 1.253253556 Bankruptcy
2012 1.362515255 Bankruptcy
2013 0.520512555 Bankruptcy
2014 0.522525156 Bankruptcy
2015 1.5215235222 Bankruptcy
2016 1.635245565 Bankruptcy
2017 1.825455841 No Bankruptcy
2018 1.3250232102 Grey area
2019 5.3652552565 No Bankruptcy
2020 8.26653561545 No Bankruptcy

All the Banks show a Bankruptcy situation in all years. Beximco No Bankruptcy situation in
only 1 years, 2020. And Incepta No bank ruptcy situation in only 3 years 2017,2019, 2020

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Portfolio B-

1. Aftab Automobiles LTD

Year Z score prediction

2011 12.2525152525 No Bankruptcy
2012 16.5243545353 No Bankruptcy
2013 12.6353253524 No Bankruptcy
2014 14.65258636585 No Bankruptcy
2015 8.5256355265896 No Bankruptcy
2016 9.126526934586 No Bankruptcy
2017 7.25214521452 No Bankruptcy
2018 2.565222453252 Grey area
2019 2.998452152552 Grey area
2020 2.456314563541 Grey area

2. BSRM Steels LTD

Year Z score prediction

2011 17.523253620163 No Bankruptcy
2012 29.521456325 No Bankruptcy
2013 12.6352256325 No Bankruptcy
2014 32.2145632145 No Bankruptcy
2015 15.5245863552 No Bankruptcy
2016 16.524563256325 No Bankruptcy
2017 19.5235632563356 No Bankruptcy
2018 22.25256325631456 No Bankruptcy
2019 29.652652525635 No Bankruptcy
2020 2.5628165265 Grey Area1.
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 3. British American Tobacco

Year Z score prediction

2011 1.325356355 Bankruptcy
2012 1.692052452 Bankruptcy
2013 1.522014521 Bankruptcy
2014 5.525863256 No Bankruptcy
2015 7.532145632 No Bankruptcy
2016 4.563145635 No Bankruptcy
2017 6.520256325 No Bankruptcy
2018 1.995204523 Grey area
2019 2.459652634 Grey Area
2020 2.862563145 Grey Area

4. Beximco Pharmaceuticals

Year Z score prediction

2011 5.786325486 No Bankruptcy
2012 3.985412012 No Bankruptcy
2013 9.352632552 No Bankruptcy
2014 2.512589632 Grey Area
2015 3.541256896 No Bankruptcy
2016 5.654147563 No Bankruptcy
2017 1.369855263 Bankruptcy
2018 1.987456325 Grey Area
2019 6.854247863 No Bankruptcy
2020 4.258632548 No Bankruptcy
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 5. Eastern Bank LTD.

Year Z score prediction

2011 25.5321456325 No Bankruptcy
2012 16.5214563256 No Bankruptcy
2013 36.4156324563 No Bankruptcy
2014 8.563245869325 No Bankruptcy
2015 8.59856263366 No Bankruptcy
2016 10.65256325663 No Bankruptcy
2017 19.52565625636 No Bankruptcy
2018 25.56329532953 No Bankruptcy
2019 18.525829632459 No Bankruptcy
2020 26.445586329658 No Bankruptcy

Most of the companies in Portfolio B show No Bankruptcy situation in all years.

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 Conclusion
After all our calculations and computations, we can safely say that the Portfolio B is
performing much better and is a far better position than Portfolio A.

Portfolio A has a higher beta value, but lower return compared to Portfolio B. Making it clear
that investments in Portfolio B are more profitable and wiser than in Portfolio A.

The Z-score and Bankruptcy prediction also point us to the same direction. All of the
companies in Portfolio A are experiencing and Bankruptcy situation in almost all the years.
Whereas, in Portfolio B, only a few companies show a Bankruptcy situation in some years.

Therefore, any interested investor should go for Portfolio B.

Sites used for data collection:

1. LankaBangla.com
2. Dsebd.org
3. Yahoo finance.com

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Reference :

Eastern Bank Ltd Historical Price Data (ENBK). (n.d.). Investing.com. Retrieved
November 22, 2022, from https://www.investing.com/equities/eastern-
bank-ltd-historical-data

Dhaka Bank Ltd Historical Price Data (DHBK). (n.d.). Investing.com. Retrieved
November 22, 2022, from https://www.investing.com/equities/dhaka-
bank-ltd-historical-data

National Credit and Commerce Bank Ltd Historical Price Data (NCCB). (n.d.).
Investing.com. Retrieved November 22, 2022, from
https://www.investing.com/equities/national-credit-and-commerce-bank-
historical-data

Beximco Pharmaceuticals Ltd Historical Price Data (BXPH). (n.d.). Investing.com.

https://www.investing.com/equities/beximco-pharmaceuticals-ltd-
historical-data

British American Tobacco Bangladesh Co Ltd Historical Price Data (BATC). (n.d.).
Investing.com. Retrieved November 22, 2022, from
https://www.investing.com/equities/british-american-tobacco-bangladesh-
historical-data
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