4. CONSTRUCTION OF EFFICIENT PORTFOLIO
OBJECTIVES
Preparing variance Covariance Matrix to calculate Portfolio
Risk & Return
Maximizing Theta allowing & not allowing Short sell
Minimizing Risk by allowing & not allowing Short sell
Minimizing Risk for a given Return by allowing & not
allowing Short sell
6. SELECTION OF ASSET
INDUSTRY ANALYSIS
To achieve “Vision 2021” Bangladesh needs to develop
several industries extensively including…..
Power
Infrastructure
Housing
Finance
7. SELECTION OF ASSET
INDUSTRY SELECTION
Bank
NBFI
Engineering
Fuel & power
Textile
Pharmaceuticals & Chemicals
Cement
General Insurance
8. SELECTION OF ASSET
CRITERIA FOR SECURITY SELECTION
Must be listed in DSE before January, 2006
Must be “A” category stock
Must be the industry leader or closest competitor to the
industry leader
Company P/E ratio must be lower than the industry P/E
ratio
Company must be in the growth stage
9. SELECTION OF ASSET
P/E RATIO OF SECURITIES
Industry Company Company P/E Industry P/E
Bank
Pubali Bank 11.97
12.44
NCC Bank 10.38
NBFI Prime Finance 21.92 33.65
Insurance
Green Delta General
insurance 21.92 38.13
Fuel & Power
BOC 13
15.67
Summit Power 26
Cement Aramit Cement 18 21.36
Pharmaceutical Square Pharma 17.79 27.1
Engineering Aftab Automobiles 6.66 24.72
Textile Bextex 13.87 28.25
10. SELECTION OF ASSET
CORRELATION MATRIX
Pubali
Bank NCC Bank
Prime
Finance
Aftab
Automobiles
Sumit
Power BOC Bextex
Square
Pharma
Aramit
Cement
Green
Delta Index
Pubali Bank 1.0000
NCC Bank 0.7006 1.0000
Prime Finance 0.1744 0.1285 1.0000
Aftab
Automobiles -0.0922 -0.1213 0.0992 1.0000
Sumit Power 0.2643 0.1593 0.1783 0.1003 1.0000
BOC 0.1870 0.1136 0.3437 0.0694 0.1946 1.0000
Bextex -0.0517 0.1424 0.2104 0.2130 0.3473 0.1675 1.0000
Square Pharma 0.2794 0.3459 0.2847 0.1021 0.3515 0.0485 0.1658 1.0000
Aramit Cement 0.2565 0.2035 0.2411 0.2559 0.2413 0.3352 0.0724 0.4505 1.0000
Green Delta 0.1082 0.2522 0.4295 0.2887 0.1878 0.2100 0.3059 0.3881 0.3772 1.0000
Index 0.6823 0.6697 0.3213 0.1199 0.3181 0.3248 0.2311 0.5131 0.3619 0.2585 1.0000
11. PORTFOLIO CONSTRUCTION
CALCULATION OF RETURN
Capital gain return, rt = LN ( Pricet/ Pricet-1)
Return from Cash dividend is = LN (dividend amount/ Pricet-1)
Return from stock dividend= LN {( Pricet* % of stock dividend)/ Pricet-1}
So the final formula is= LN [{Pricet*(1+ % of stock dividend) +Cash
dividend}/ Pricet-1]
For the right share, return= LN [Pricet /{Pricet-1 +(right ratio* right
price)/(1+right ratio)}]
12. MAXIMUM THETA
θ Portfolio
Return
Risk
Without
Short Sell
0.588388165 0.046930667 0.073274757
With
Short Sell
0.666214377 0.058171493 0.081893586
Asset Without
Short Sell
With Short
Sell
Pubali Bank 0 -0.3044
NCC Bank 0.35341 0.6502
Prime Finance 0.13122 0.16707
Aftab Automobiles 0.22518 0.26265
Summit Power 0.05536 0.16556
BOC 0.13745 0.18242
Bextex 0 -0.1903
Square Pharma 0 -0.0333
Aramit Cement 0.05473 0.04144
Green Delta 0.04266 0.05865
13. MINIMUM RISK
θ Portfolio
Return
Risk
Without
Short Sell
0.529979743 0.03814196 0.064767179
With
Short Sell
0.512650373 0.036450173 0.063648835
Asset Without
Short Sell
With Short
Sell
Pubali Bank 0 0.00583
NCC Bank 0.31541 0.30769
Prime Finance 0 -0.0064
Aftab Automobiles 0.15154 0.16493
Summit Power 0.01728 0.02212
BOC 0.29647 0.32894
Bextex 0 -0.0112
Square Pharma 0.2193 0.26422
Aramit Cement 0 -0.0893
Green Delta 0 0.01315
14. MINIMUM RISK GIVEN RETURN
θ Portfolio
Return
Risk
Without
Short Sell
0.156266421 0.02 0.101938324
Without
Short Sell
0.554409848 0.04 0.065264593
With
Short Sell
0.214749528 0.02 0.074627376
Asset Without
Short Sell
With Short
Sell
Pubali Bank 0.37893 0.23811
NCC Bank 0 0.05294
Prime Finance 0 -0.137
Aftab Automobiles 0 0.09171
Summit Power 0 -0.086
BOC 0.05437 0.43789
Bextex 0.38415 0.12642
Square Pharma 0.18256 0.48664
Aramit Cement 0 -0.1889
Green Delta 0 -0.0218
