Business Finance II, FIN302

Section: 01
Topic: Construction of two optimal Portfolios and Computing Z-score

Date of Submission: April 22, 2020

Submitted To:
Mr. Mohammad Fahad Noor
Lecturer Independent University, Bangladesh

Submitted By:
Name ID

Md Jakariya 1721869

Md Sadman 1722158

MK Abir 1720219

Mahmud Hasan Avee 1821724

Letter of Transmittal
To,

Mr. Mohammad Fahad Noor

Lecturer Independent University, Bangladesh Date: 22th April, 2020

Subject: Submission of Report on Comparison between Two Optimal Portfolio and Z-score

Dear Sir,

With due respect, it is our pleasure and honor to be your student and have this opportunity to
present the report on Optimal Portfolio and Z-score. While preparing the report, we have given
our best focus thoroughly on the topic regarding this project.

When writing the report, we gave our utmost to collect the information available, and that we
will be more than happy to answer every query and make it fully clear to you. Thank you for all
the help and support you have provided us in writing this study.

Sincerely yours,

Md Jakariya

Md Sadman

MK Abir

Mahmud Hasan Avee

Acknowledgement

In the completion of this report, we had to take the help and guideline of our respected faculty,
who deserves our earnest gratitude. While working on this report, we had immense pleasure in
gaining valuable insights about the stock market and various financial metrics vital for every
companies. We were honored to have our esteemed faculty, Mr. Mohammad Fahad Noor,
Lecturer, Independent University, Bangladesh, for continuously giving us a solid guideline and
tireless cooperation to successfully finish this report. We express our deepest gratitude towards
our honorable faculty, Mr. Mohammad Fahad Noor Sir. Also, we are very much thankful to all
those who have directly and indirectly guided us in writing this report.

Many people, especially our team members themselves, have made valuable comments and
suggestions on this proposal, which gave us an inspiration to improve our assignment by a large
margin. We deeply appreciate everything each member has done for the project.
Table of Contents

Introduction
Monthly Return of Individual Stocks
Average Return of Individual Stocks
Variance and Standard Deviation of Individual Stocks
Covariance and Correlation
Beta for Individual Stocks
Variance and Covariance Matrix
Optimal Portfolio
Portfolio Beta
Comparison between the Portfolios
Z-Score Conclusion0Reference
Introduction
In our Assignment, at first, we needed to construct two different portfolios. In portfolio 1, we had
to consider five stocks from same industry. In portfolio 2, we had to consider stocks from
different industry. We had considered the stocks which are listed in Yahoo Finance and for each
stock, we had collected monthly closing price for last 10 years.
(https://finance.yahoo.com/portfolios, 2020)

So, for Portfolio 1, the 5 company we choose from the same industry, which is under
Pharmaceuticals Sector and the Companies are: -

• Sanofi-Synthélabo

• Danaher Corporation

• CVS Health Corporation

• Vertex Pharmaceuticals Incorporated

• Novo Nordisk A/S

And for Portfolio 2, we have chosen companies from different industry and they are: -

• British American Tobacco

• Berger Paints India Ltd

• Beximco Pharmaceuticals Ltd

• GrameenPhone

• Singer India Ltd

We had collected these company’s data of 10 years from Yahoo Finance. We did our
calculations by using their monthly closing price for last 10 years.

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Calculations Summary

Monthly Return of Individual Stocks

At first, to calculated Average return, we need to calculate the month return of each companies.
The formula we used for calculating monthly return is: -

= (Current Price-Previous Price)/Previous Price.

For example, the share price of Grameenphone was 355.30 at the end of February, 2011 and their
previous share price was 266.90 at the end of January, 2011.

Therefore, we calculated the formula by inputting = (355.30-266.90)/266.90, in MS Excel, which

gave us the result of 0.33121 = 33.21%.

So, that’s how we calculated the monthly return of rest of the individual stocks as well.

Average Return of Individual Stocks

To calculate Average return, we needed the monthly return of each companies, which we had
already calculated. So, for calculating Average return, the formula we input on Excel was: -
=Average (monthly return reference cells). Suppose, we wanted the average return of Berger
Paints India Ltd, and the monthly returns of Berger Paints India Ltd which we calculated
previously starts from K3 to K122 in Excel, we would take all the monthly returns from this
range and input this in the function, =Average (K3:K122), which gives us the result of,
0.526179423 that means that, the average return of Berger Paints India Ltd. So, that’s how, rest of
the calculation on average return was done as well.

Measures British Berger Beximco

American Paints Pharmaceutic GrameenPho Singer
Tobacco India Ltd als Ltd ne India Ltd
Average return 0.45260308 0.52617942 7.0574855
1.222313864 0.981035449
6 3 85

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Variance and Standard Deviation of Individual Stocks
Just like the way we calculated Average returns; variance was also calculated by the same way.
The function we used for computing variance was: -

=Var (all returns).

So, after calculating average return of British American Tobacco, we calculated its variance also
in the same way, like,

=Var (J3:J122), which gives us the variance of 21.19050698

And as it’s known, standard deviation of a stock is calculated by square rooting its variance, so
in the time of computing SD, the function we input was =SQRT(Variance). Therefore, after
getting British American Tobacco, we just input the function, =sqrt(variance) and thus we got the
result of 4.603314782=04.60%

Measures British Berger Beximco

American Paints Pharmaceutica GrameenPho Singer
Tobacco India Ltd ls Ltd ne India Ltd
Average return 0.45260308 0.52617942 7.05748558
1.222313864 0.981035449
6 3 5
21.1905069 30.2631393 5979.99603
Variance 179.8702344 114.3018535
8 9 4
4.60331478 77.3304340
SD 5.50119436 5.50119436 10.69120449
2 8

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Covariance and Correlation
As, we all know, Covariance and Correlation must be calculated with two stocks. In total we
chose 10 stocks as we have mentioned earlier, 5 for Portfolio 1 and other 5 for Portfolio 2. So,
there were total 10 Covariance and Correlation in Portfolio 1 and Portfolio 2. To calculate
covariance, we needed the monthly return of two individual company. The function we used for
calculation of Covariance was: -

=Covariance. P (Monthly returns of 1st company, Monthly returns of 2nd company)

For example, to calculate the covariance of Grameenphone and Beximco Pharmaceuticals, the
function we input was, =COVARIANCE.P (L3:L122, M3:M122), because, monthly returns of
Grameenphone were in the L column and Beximco Pharma were in the M column. So, that
calculation gave us a result of 142.1844256. In this way, we calculated a of total 10 Covariances
for the 10 stocks we chose. The calculation of Correlation was done pretty similar as Covariance.
There were 10 correlation for 10 companies just like for covariance. And the function we used
for calculating correlation was, =Correl (Monthly Return of 1st company, Monthly Return of 2nd
company). So, for correlation between Grameenphone and Beximco pharma we input the
function, =Correl (L3:L122, M3:M122), which gave the result of, 0.999954009. It implies
Grameenphone and Beximco pharma stock are positively correlated with each other.

Covariance
Covariance British American Tobacco 25.10572487
Covariance Berger Paints India Ltd 73.14292003
Covariance Beximco Pharmaceuticals Ltd 142.1844256
Covariance GrameenPhone 819.8329528
Covariance Singer India Ltd 352.9219464

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 Correlation
Correlation British American Tobacco 0.999722317
Correlation Berger Paints India Ltd 0.99970057
Correlation Beximco Pharmaceuticals Ltd 0.999954009
Correlation GrameenPhone 0.999959869
Correlation Singer India Ltd 0.999750957

Beta for Individual Stocks

To calculate Beta of individual stock in excel, we needed the individual monthly return of the
company, which we already have and also the market price index returns as a benchmark for
calculating Beta for each and every stock we chose. We collected the monthly closing price
index from Yahoo Finance for last 10 years at first. Then we calculated the price index return the
same way as we calculated monthly return of each stock. So, after that, the function we input for
Beta calculation was,

=COVARIANCE.P(Return of Stock, Return of Market)/VAR.P(Return of Stock).

Suppose, while calculating the Beta value of Grameenphone, we input the function SLOPE
(J3:J122, O3:O122). So, like this, we calculated Beta for rest of the stocks as well.

Stocks Beta value of Stocks

British American Tobacco 10.48083075
Berger Paints India Ltd 12.52823327
Beximco Pharmaceuticals Ltd 30.46904407
GrameenPhone 24.2967134
Singer India Ltd 175.7716553

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Variance and Covariance Matrix
To calculate Variance-Covariance matrix, we needed the mmult function. The MMULT function
returns the matrix product of two arrangements. We used the function, =Variance (Return
Average).

In order to get the variance and covariance from this function, we needed to select the monthly
returns of all the stocks from each portfolio together. So, at first, we input each of the company
name both vertically and horizontally in a tabular format. Then, we had to select the entire table
from 1st to last cell of those 5 stocks with no value, then in the formula bar we input,

=COVARIANCE.S($J3:$J122,J3:J122). After that we had to press, ctrl+shift+enter to get the

exact value. This formula is not for 1 but for 5 companies together and both the portfolio. By
applying this formula vertically and horizontally it gave us the variance and covariance of the
stocks in each portfolio.

Variance - British Berger Paints Beximco GrameenPhon Singer

Covariance American India Ltd Pharmaceutica e India Ltd
Matrix Tobacco ls Ltd
British 21.1905069 25.31669735 61.72051621 49.20091979 355.887677
American 8
Tobacco
Berger Paints 25.3166973 30.26313939 73.75756641 58.79797083 425.315815
India Ltd 5 5
Beximco 61.7205162 73.75756641 179.8702344 143.3792527 1037.08497
Pharmaceutica 1 8
ls Ltd
GrameenPhon 49.2009197 58.79797083 143.3792527 114.3018535 826.722305
e 9 4
Singer India 355.887677 425.3158155 1037.084978 826.7223054 5979.99603
Ltd 4

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Optimal Portfolio
To construct an optimal portfolio in excel, we need the average returns (R) and weight (W).
Since we didn’t have any weight assigned for each stock in each portfolio, so, first we had to
calculate weight for the individual company. Before we did that, first we had to assume each
weight value as 0. We did construct 5 company name and its weight with no value, then, we got
the summation of weight, as, =sum (all weights), as there was no value, the weight was 0. Then,
to bring the weight in excel, we had to use the solver, for that, we input the functions for
calculation of Portfolio Return and Portfolio Variance. The Function we used for calculating
Portfolio Return was, =mmult(all weights, all average return) and Portfolio Variance was
=mmult(transpose(all weights),mmult(variance covariance matrix, all weights)). After that, we
opened the solver and set the objective to minimize the portfolio variance by changing
proportions of weights of the stocks in each portfolio in such a way that the total of the weights
of the stocks in each portfolio is 1. Then, we let the solver find the optimum result as we needed.
The portfolio standard deviation was calculated by square rooting the portfolio variance with the
help of the function, =SQRT(Portfolio Variance).

Optimal Portfolio
Stocks Weight
British American Tobacco 0.342308891
Berger Paints India Ltd 0.247256254
Beximco Pharmaceuticals Ltd 0.020078748
GrameenPhone 0.066032047
Singer India Ltd 0.324324059
Sum Total of Weights 1
Portfolio Measures for Different Industry's Portfolio
Portfolio Return 2.663265899
Portfolio Variance 3533835.741
Portfolio Sd 1879.849925

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Portfolio Beta
Our final calculation from each portfolio was calculating portfolio beta and to do that we needed
Beta of individual stocks from each portfolio and the Weights of each stock, both of which we
had calculated as mentioned previously. To get the portfolio beta, we simply needed to multiply
the Beta and Weights of each of the 5 stocks in the portfolios and sum the results to get our
portfolio beta. So, the function we used was

=SUMPRODUCT (Array of Beta value of individual stocks, Array of weights of individual

stocks).

Portfolio Measures for Same Industry's Portfolio Portfolio Measures for Different Industry's
Portfolio
Portfolio Return 0.644849511 Portfolio Return 2.663265899
Portfolio Variance 1978.673591 Portfolio Variance 3533835.741
Portfolio Standard Deviation 44.48228401 Portfolio Sd 1879.849925
Portfolio Beta 1.141209336 Portfolio Beta 65.90848427

Comparison between the Portfolios

Since we did each calculation with respect to the ideal portfolio and based on the results, we
decided that the portfolio was the most optimal of the two portfolios we worked on. First, each of
our portfolios has a portfolio beta. We understand that if a stock has a beta of 1.0, it shows that it
is as volatile as the stock market. A beta estimate below 1.0 indicates that the portfolio is less
risky. A beta value greater than 1.0 shows that the value of the portfolio is much more volatile
than the market.

In our report we can see in portfolio 1 Maximum of the stocks Beta is more then 1 except one.
On the other hand, in portfolio 2 all the stocks beta is more than 1. Again portfolio 2 beta is
greater than portfolio 2 beta. So the return of portfolio 2 is more and portfolio 2 is more
profitable.

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Z-Score
Our final task for this report was to compute the Z-score i.e. a measure for bankruptcy prediction
of a company. In order to proceed with the calculations, we collected the financial metrics
required to calculate z-score for public trading companies from Yahoo Finance and also the
company’s websites. We had to calculate the z-scores of all the 10 stocks for past 10 years
(2011-2020), individually. After collecting the data of the required metrics, we made a separate
table to compute the relevant ratios So, we input all the coefficients in this formula in a separate
column and calculated the product of the ratios and coefficient associated with each ratio for
each of the years for a particular stock in the adjacent columns. Then after getting the results
from the ratios of each company individually, we had to sum up the results for each company to
get the Z-score. So, what we did next was input the function, =SUM (Ratio array of the
company). Then for example, to get the z-score of HR Textiles for the year 2020, we input,
=SUM (N9:N12) where the array, M9:M12 Ratios. This is how we calculated the rest of the Z-
scores. Then at the bottom of each z-score we included another row in all the tables we made for
each of the 10 companies and there, the bankruptcy zone was predicted as per the scores we
derived.

Sanofi-Synthélabo
NET WORKING CAPITAL / TOTAL ASSETS 0.629814283
RETAINED EARNINGS / TOTAL ASSETS 0.598887618
EBIT / TOTAL ASSETS 0.124335321
MARKET VALUE OF EQUITY / TOTAL
1.610408314
LIABILITIES
Z Score Year (2020) 2.963445536

Grey Area

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Conclusion
Best portfolio, among all considered portfolios, is the best portfolio (asset distribution) for any
type of company. Classic goals behind a classic portfolio optimize variables like expected returns
and reduce costs such as financial risk.

The risk is differentiated by different methods of portfolio optimization. Standard deviations,

differences and returns are important to create the best portfolio slots in addition to conventional
systems. Some investors may set their total capital in the joint portfolio rather than investing
individually and subsequently split the investment advantage (uncertainty) in a way that best fits
their risk choices. Therefore, they build a favorable portfolio where they earn a return and risk
based on their choices.

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REFERENCE:

Yahoo Finance - Stock Market Live, Quotes, Business & Finance News

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