Letter of Transmittal

Date: 20th May, 2023

Md. Nurul Kabir

Associate Professor and Chair

Department of Accounting & Finance

School of Business and Economics, North South University

Subject: Submission of Assignment on Portfolio and Efficient Frontier .

Sir,

With due respect, we are delighted to inform you that we have completed the final project
titled “Portfolio and Efficient Frontier” which we had been assigned for the Fin 435.8
course of spring 2023. Throughout the course, we have learned many aspects which is the
true reflection of this project. Attached is an in-depth study of different perspectives relevant
to portfolio construction and optimization, as well as graphic representations of effective
natural environments. We request you to accept this report for your kind evaluation and we
sincerely hope that you will be pleased with our report.

Within the conclusion, we would like to thank you for giving us such an assignment and for
all the thoughts and direction you gave us. Subsequently, we would be obliged in the event
that you compassionately acknowledge our report.

Sincerely,

MD. Shaikat Alam Joy (1421759030)

Acknowledgement

We are delighted and humbled to express our sincere gratitude to our esteemed faculty
member, Md. Nurul Kabir, whose crucial leadership and encouragement coordinated and
significantly improved the way we carried out this project.

We are incredibly grateful to the North South College Division of Bookkeeping & Fund for
providing such a well-designed course and the offices they provide, which greatly helped us
to carry out this stretch methodically.

Finally, we would like to express our gratitude to everyone who helped make this report a
success, whether directly or indirectly.
Executive Summary

This report is based on the financial statement analysis done on the companies- Eastern
Bank, Orion Pharma, BSRM Steels, HEIDELBCEM Bangladesh, and Genexil. This
executive summary summarizes the portfolio report, which analyses the performance and
features of Eastern Bank, Orion Pharma, BSRM Steels, and HEIDELBCEM and Genexil.
The paper focuses on important issues such as financial performance, risk analysis, and
portfolio diversification.

From five industries to find out which sets of stocks outperform others in the market. We
took the daily price of the selected stocks from 16.01.2015 to 31.12.2021 and calculated the
average stock price. We had run regression analysis and we calculated variance, correlation
and covariance of stocks. We have also calculated bets of stocks which tells how each
security has a volatile nature with the market. Lastly using the portfolio performing analysis,
we find out the top 5 portfolios on the efficient frontier based on risk, return and risk adjusted
return.

 
Table of Content

1. Introduction …………………………………………………………… 1
2. Findings & Analysis …………………………………………………... 1
2.1. Average Daily Risk & Return of the Stocks ……………………... 1
2.2. Average Daily Risk & Return of DSEX………………………….. 2
2.3. Correlation & Covariance of Each Pair of Stocks ……………….. 2
2.4. Beta of Stocks ……………………………………………………. 3
2.5. Decompose the total risk into systematic and firm specific risk … 4
2.6. Efficient Frontier ………………………………………………… 4
2.7. Variance-Covariance Matrix …………………………………….. 5
2.8. Our Portfolio …………………………………………………….. 5
3. Conclusion …………………………………………………………… 7
Introduction

In 1954, the Dhaka Stock Exchange became the East Pakistan Stock Exchange. It later
commenced operations in 1956. In 1964, it was renamed Dacca Stock Exchange. The Dhaka
Stock Exchange (DSE) is a public limited company, and its operations are governed by its
Articles of Association Rules and Regulations, the Exchange and Securities Regulations-
1969, the Companies Act-1994, and the Securities and Exchange Commission Act 1993.
During the last two decades.

A number of institutional and administrative developments in the capital market have led to
the emergence of a variety of capital market intermediaries. By providing money, the stock
market plays a key role in industrial progress.

We were tasked with developing a portfolio of five distinct firms that are listed on the Dhaka
Stock Exchange. We calculated their average daily return over the previous 5 years, as well
as the correlation and coefficient of our picked firms with each other and with the market. We
also calculated the beta of each stock using regression analysis and compared it to the beta
that is currently available on the market.

 Findings and Analysis

Average Daily Risk and Return of the Stocks

Average Daily risk and return measures how a share is performing based on per day and their
daily risk. 
Company Name Return Risk
EBL 0.06% 0.03%

ORION PHARMA 0.06% 0.05%

BSRM 0.10% 0.03%
HEIDELCEM -0.02% 0.03%
GENEXIL 0.17% 0.06%

Here 4 companies are giving positive returns which are: Eastern bank and Orion Pharma
0.06%, BSRM Steels 0.1% and Genexil 0.17%. In 5 years their stock price went up by

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109.5% for EBL and Orin Pharma, 182.5% for BSRM steels and 310.25% for Genexil. So all
those stocks are doing well. On the other hand, HEIDELBCEM had given negative average
returns of -0.02%. So Genexil gave the highest return and HEIDELBCEM gave the lowest
return. 

Average daily Risk variance estimates how much an investment can fluctuate from average
daily return. In terms of risk variance Genexil had the highest risk they also had the highest
return, which is in terms of the daily return of 0.17% can fluctuate by 0.06% it may go up or
down by 0.06% from 0.17%. Orin Pharma has the 2nd highest risk variance which is 0.05%.
There are 3 companies with the lowest risk variance. The companies are HEIDELBCEM,
BSRM and EBL which is 0.03%. That means they are more stable and easier to predict. 

So on a daily basis Genexil has the most Risk variance and also the highest daily return. 

Average Daily Risk and Return of DSEX

DSEX is a portfolio made by the best 30 stocks of Dhaka stock exchanges. In our portfolio,
we measured DSEX because all the companies we selected are enrolled in Dhaka stock
exchange. 

Return Risk (variance)

DSEX 0.021% 0.006%

Here daily average return of the DSEX is 0.021%. Which means everyday they give on
average 0.021% of return. DSEX Risk variance is 0.006%. So it means that 0.021% return
can fluctuate by 0.006%. It is comparatively low due to diversification of many companies in
the portfolio. 

Correlation and Covariance between each Pair of Stocks 

Covariance is a measure of connection between two risky assets and how much they vary
together. A positive covariance means that asset returns move together in the same direction.
A negative covariance means return moves inversely. Addling assets with a negative

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covariance to a portfolio reduces the overall risk. Correlation is a statistical measure that
describes how closely two variables are connected linearly. It represents the connection
between different asset types in a portfolio. It varies between -1 and +1 of how two stocks
move in relation to each other. The lower the correlation, the better the portfolio is. In the
data presentation we notice that stocks are perfectly positively correlated. It indicates that the
investment rises when the market rises and falls when the market falls. It solely measures the
direction of movement over time, not the similarity of returns.

Company Name Covariance Correlation

EB & ORION 0.00004 0.11292
EB& BSRM 0.00005 0.11291
EB & HDLGBG 0.00003 0.11288
EB & GEN 0.00001 0.11296
ORION & BSRM 0.00010 0.11291
BSRM & HEDL 0.00007 0.11313
HDL & GEN 0.00002 0.66304

Beta of the Stocks

Beta indicates standard deviation or volatility of stocks. A stock with a beta of 1.0 moves in
lockstep with the market. This indicates that if the DSEX rises 1% in a day, the stock should
rise precisely 1% in a day. If beta is negative, it goes in the opposite direction of the market. 

In this section, we can see how much impact the overall market has on each stock. A
company with beta more than 1 should expect more average return than the market return. 

Stocks Beta
EBL 0.812
ORIONPHARM 1.259
BSRM 1.107
HEIDELBCEM 0.793
GENEXIL 0.05

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 DSEX 1

Here, Orion Pharma and BSRM steels have beta more than 1 means their average return
should be higher than their market return. On the other hand, Easter Bank, Genexil, and
HEIDELBCEM beta is less than 1 which means the price of the stock is less volatile than the
entire market.

Decompose the total risk into systematic and firm specific risk

R 1-R Systematic Firm Specific

Socks Beta Variance square Square Risk Risk
EBL 0.812 0.026% 0.167 0.833 0.004% 0.021%
ORIONPHARM 1.259 0.045% 0.226 0.774 0.010% 0.035%
BSRM 1.107 0.034% 0.235 0.765 0.008% 0.026%
HEDLBCEM 0.793 0.029% 0.140 0.860 0.004% 0.025%
GENEXIL 0.050 0.061% 0.000 1.000 0.000% 0.061%
DSEX 1 0.81%

There are only two kinds of risk of every stock: one is market risk or Systematic risk, the
other one is firm specific risk or Unsystematic risk. One can diversify their firm specific risk
but they have no control over systematic risk. It is measured by Beta.

Efficient Frontier

We design an efficient frontier after computing a possible combination of portfolio risk and
return. All Efficient portfolios are efficient sets of portfolios where the return at a given level
of risk is optimal, portfolios beyond the frontier line are desired but unattainable, whereas
portfolios below the frontier line are easily accessible but undesirable. 

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Variance-Covariance Matrix

A covariance is the measure of the directional relationship between two random variables,
while a variance is the spread of a data set around its mean value. A variance-covariance
matrix is a square matrix that contains the variances and covariance of a large number of
variables. The variance-covariance matrix expresses variability and co-variation across the
data matrix's columns.

Company Name EBL ORIONPHARM BSRM HEIDELBCEM GENEXIL

EBL 0.0255% 0.0038% 0.0050% 0.0026% 0.0008%
ORION PHARMA 0.0038% 0.0455% 0.0105% 0.0073% 0.0014%
BSRM 0.0050% 0.0105% 0.0338% 0.0069% 0.0011%
HEIDELBCEM 0.0026% 0.0073% 0.0069% 0.0290% 0.0018%
GENEXIL 0.0008% 0.0014% 0.0011% 0.0018% 0.0608%

Our Portfolio

Here, we can see we are getting the highest Sharpe ratio of 0.0615 at the weight of 26%
EBL, 15% ORION PHARMA, 0% BSRM, 0% HEIDELBCEM, 59% GENEXIL where
the entire portfolio’s return is 0.12% & the risk of the portfolio is 1.56%. So, that particular
distribution of the weight for each stock is providing the higher return with the higher Sharpe
ratio. This is the portfolio that provides maximum utility than all other portfolio
combinations. The risk free rate was daily rate of 10Y T-bill which is 0.024%.

Company Name EBL ORIONPHARM BSRM HEIDELBCEM GENEXIL

Weight 26% 15% 0% 0% 59% Portfolio with

Portfolio maximum Sharpe
0.12
Return % Ratio (0.0615)

Portfolio 1.56
%

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 Standard
Deviation
Weight 32% 12% 16% 25% 15%

Portfolio 0.05
Portfolio with
Return %
minimum Standard
Portfolio
Deviation
Standard 1.01
Deviation %

On the other hand, from the efficient frontier line we have gotten a portfolio with minimum
standard deviation (1.01%) with portfolio return (0.05%) which is the border line of
investment. Under this line we will have to consider the higher degree of risk for the same
amount of return which is not making sense.  

Risk free rate daily rate of 10Y T-bill 0.024%

Company Name Weight Investment
EBL 26% 260000

ORION PHARMA 15% 150000

BSRM 0% 0
HEIDELBCEM 0% 0
GENEXIL 59% 590000
1000000

Now more specifically we have invested 260000 BDT in EBL out of 1000000 BDT which is
26% of the entire amount. After that, 150000 BDT for ORION PHARMA which is 15% of
10, 00000 BDT. There is no investment for BSRM & HEDELBERG CEMENT & Finally,
We have invested 59% of the total amount in Genexil which is 59000 BDT. From this
investment we are going to get 0.12% return.
Company Name Weight Investment
EBL 32.22% 322200
ORION PHARMA 12% 120000
BSRM 16% 160000
HEIDELBCEM 25% 250000
GENEXIL 15% 150000

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 1000000

CONCLUSION

To conclude this project must say that after computing all the different combinations of
portfolio risk & return this project can be concluded that the GENEXIL and BSRM
combination offer higher return with a given level of risk. Given the behaviour of their
financial backers, they are free to favour any portfolio mix from the productive periphery.
Investors that are afraid of taking risks like EBL, BSRM, and HEIDELBCEM stock. Even if
it is less hazardous, the return on the HEIDELBCEM is negative (-0.02%). As risk-takers,
Orion Pharma and Genexil link remuneration to higher risk. Risk-averse investors, on the
other hand, prefer compensation with less risk. Choosing a portfolio and investing in it are
entirely dependent on the investor's investment choice. The only way to pick the right stock
at the right time and make money is to know enough about the stock market.

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