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Portfolio Construction and Evaluation

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Portfolio Construction and Evaluation

  1. 1. Welcome to my presentation
  2. 2. Efficient Portfolio Construction & Evaluation of Portfolio Performance
  3. 3.  Introduction  Macro factor Analysis  Industry analysis of selected firms  Company Analysis  Portfolio Construction Outcomes  Portfolio Performance evaluation  Conclusion
  4. 4.  Portfolio management is the management of combination between different securities that will produce maximum returns by handling minimum risk.  An investor can maximize the returns of a portfolio by choosing securities with high returns and minimize the risk by diversification of securities. By using completely diversified portfolio, an investor can eliminate most or all unsystematic risk. So the goal of an investor when s/he invests in portfolio of securities is to choose a portfolio with high expected return and low risk. Portfolio management performs this job.
  5. 5. 0 2 4 6 8 10 12 14 16 18 2008 2009 2010 2011 2012 Real GDP Growth Rate of Bangladesh GDP growth rate and stock market performance in Bangladesh(2008-12) As we can see from the previous two charts, real GDP growth rate of Bangladesh is almost stable in fact increasing although at a slow rate but stock market index (DGEN) fell significantly at the year of 2011 although the economic growth measured by real GDP growth rate increased from 6% in 2010 to 6.1% in 2011.
  6. 6. 0 2 4 6 8 10 12 14 16 18 2008 2009 2010 2011 2012 Bangladesh Inflation Rate (CPI) Inflation and stock market performance in Bangladesh: In Bangladesh there is an adverse relationship between inflation rate and stock index as can be seen from the following two graphs. At the year of 2011 inflation rate increased significantly and at the same time a sharp decline in DGEN is also visible in that year.
  7. 7. 0 2 4 6 8 10 12 14 16 18 2008 2009 2010 2011 2012 Lending Interest Rate Interest rate and stock market performance in Bangladesh: After comparing Lending interest graph of Bangladesh and DGEN graph from 2008 to 2012 it is found that there is an inverse relationship between lending rate and stock market. From 2008 to 2009 lending rate is showing decreasing trend whereas DGEN is showing increasing trend. In the year of 2011 lending rate increased and but DGEN is showing a decreasing trend at that year..
  8. 8. Industry and Business segment Company Bank 1. DBBL 1. PRIME Cement 1. HEILDEL Textile 1. Metro Spinning 1. SQUARE Engineering 1. Berger Paints Non-Bank financial institutions 1. IDLC Pharmaceuticals 1. Beximco Pharmaceutical Insurance 1. Phoenix Insurance Real Estate 1. Eastern Housing Ltd •To perform the job of portfolio management we choose information on securities of 10 different companies from 8 different industries. The major focus is to diversify the portfolio through different asset classes to diverse away the micro economic industry specific risk which is the unsystematic risk •There are specific reasons behind our choice of the industries and the companies. We choose banking, food, cement, pharmacy, and insurance industries. These industries are the leading industries of the financial market of Bangladesh. They represent most of the part of our financial sector. All the companies we chosen are A rated companies.
  9. 9. Company Market Value (2012) P/E (2012) Turnover (2012) DBBL 117 8.64 5322 (mn) PRIME 37 18.47 1271 HEILDEL 264.7 17.38 7973 Metro Spinning 37.3 19.73 251 SQUARE Textiles 102.8 15.06 5904 Berger Paints 550 26.00 6543 IDLC 91.9 14.04 1496 Beximco Pharmaceutical 55.9 12.89 7620 Phoenix Insurance 58 16.67 336 Eastern Housing Ltd 44 18.87 1871
  10. 10. Portfolio Return 0.498502482 Portfolio Excess Return 0.492441183 Portfolio Variance 0.042800963 Portfolio Standard deviation 0.206883937 ΣWi 1 Theta (Θ) 2.380277511 Company Weights DBBL 0.1 PRIME 0.1 HEILDEL 0.1 SQUARE 0.1 Metro Spinning 0.1 Berger Paints 0.1 IDLC 0.1 Beximco Pharmaceutical 0.1 Phoenix Insurance 0.1 Eastern Housing Ltd 0.1 Equal Weights: If I put equal weight in each of the stock my return will be 49.85% and risk will be 20.68%. The sharp ratio is 2.38 indicates that I will be receive 2.38 tk. return for taking 1 tk. additional risk Portfolio Return 0.379247 Portfolio Excess Return 0.373186 Portfolio Variance 0.022132 Portfolio Standard deviation 0.148767 ΣWi 1 Theta (Θ) 2.50852 Company Weights DBBL 0 PRIME 0 HEILDEL 0 SQUARE 0 Metro Spinning 0 Berger Paints 1 IDLC 0 Beximco Pharmaceutical 0 Phoenix Insurance 0 Eastern Housing Ltd 0 MINIMUM RISK, NO SHORT SALE: The above results suggest that I should not invest any of my fund in DBBL,PRIME,HEILDEL,SQUA RE, Metro Spinning ,IDLC,Beximco Pharma,Phonix Insurance,eastern housing ltd. And invest most of my funds (62%) in Berger Paints if I want to assume minimum risk (14.87%) and no short sale. Here the sharp ratio is 2.50 which mean that I can achieve 2.50 tk. returns for assuming 1 tk. additional risk.
  11. 11. Portfolio Return 0.006936 Portfolio Excess Return 0.000875 Portfolio Variance 0.114182 Portfolio Standard deviation 0.337908 ΣWi 1 Theta (Θ) 0.002589 Company Weights DBBL -0.26919 PRIME 0.093929 HEILDEL 0.147066 SQUARE 0.147825 Metro Spinning 0.149545 Berger Paints 0.15 IDLC 0.145725 Beximco Pharmaceutical 0.147771 Phoenix Insurance 0.143761 Eastern Housing Ltd 0.143573 MINIMUM RISK, SHORT SALE: The above results suggest that if I want to achieve minimum risk with short selling approach I have to short sale the securities of DBBL and invest most of my funds in rest nine securities. The sharp ratio of 0.0025 indicates that under this strategy I can achieve 0.0025 tk. returns for assuming 1 tk. additional risk Portfolio Return 1.78924 Portfolio Excess Return 1.783179 Portfolio Variance 1.629003 Portfolio Standard deviation 1.276324 ΣWi 1 Theta (Θ) 1.397121 Company Weights DBBL 0 PRIME 1 HEILDEL 0 SQUARE 0 Metro Spinning 0 Berger Paints 0 IDLC 0 Beximco Pharmaceutical 0 Phoenix Insurance 0 Eastern Housing Ltd 0 MAXIMUM THETA, NO SHORT SALE: The above result suggests that if I want to maximize theta (sharp ratio) without using short selling approach I have to invest only Prime. Doing so will generate a return of approximately 178% at a risk of 127.73%. The sharp ratio is 1.39 here indicating that I can achieve 1.39 tk. returns for assuming 1 tk. additional risk.
  12. 12. Portfolio Return 0.532496 Portfolio Excess Return 0.526435 Portfolio Variance 0.121354 Portfolio Standard deviation 0.348359 ΣWi 1 Theta (Θ) 1.511186 Company Weights DBBL 0.282163 PRIME -0.04224 HEILDEL 0.090799 SQUARE 0.094621 Metro Spinning 0.118641 Berger Paints 0.110875 IDLC 0.080985 Beximco Pharmaceutical 0.096244 Phoenix Insurance 0.082137 Eastern Housing Ltd 0.085779 MAXIMUM THETA, SHORT SALE: The above result suggests that if I want to maximize theta (sharp ratio) using short selling approach I have to short sale the securities of Prime.Doing so will generate a return of approximately 53.24% at a risk of 34.85%. The sharp ratio is 1.51 here indicating that I can achieve 1.51 tk. returns for assuming 1 tk. additional risk. Portfolio Return 0.70 Portfolio Excess Return 0.426674 Portfolio Variance 0.030164 Portfolio Standard deviation 0.173679 ΣWi 1 Theta (Θ) 2.456687 Company Weights DBBL 0.157981 PRIME 0.2 HEILDEL 0.124137 SQUARE 0.123136 Metro Spinning 0.22192 Berger Paints 0.131653 IDLC 0.122637 Beximco Pharmaceutical 0.118851 Phoenix Insurance 0.131905 Eastern Housing Ltd 0.11162 MINIMUM RISK, NO SHORT SALE, GIVEN RETURN: The above result suggests that if I want to minimize risk without using short selling approach and want to achieve a return of 70% I have to invest most of my funds in DBBL, PRIME, SQUARE, IDLC, BERGER PAINTS, PHOENIX INSURANCE and Heidelberg Cement and nothing at popular Life Insurance. The sharp ratio 2.45 here indicates that I can achieve 2.45 tk. returns for assuming 1 tk. additional risk.
  13. 13. Risk Return 14% 37% 20% 100% 30% 140% 60% 160% 127% 178% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 14% 20% 30% 60% 127% Return Risk Efficient frontier
  14. 14. Average Portfolio Return(Rp) 0.498502482 Average Market Return(Rm) 0.36 β(portfolio) 0.037005601 Active retun(Rp-Rm) 0.14 Active retun(Rp-Rf) 0.49 Active risk(Rp-Rm) 0.097936044 Active risk(Rp-Rf) 0.3482085 δ(market) 0.309119392 Risk free 0.006061299 CAPM 0.019159014 Treynor ratio 13.30720662 Sharpe 2.380277511 Alpha 0.479343468 M2 0.381851235 information 1.414213562 Adj. Sharp 1.414213562 Maximum theta under equal weight Above two tables are the output of excels under maximum theta under equal weight. We see that frow treynor,sharpe and adjusted sharpe ratio,it is not possible to say that my portfolio has beaten the market or outperformed the market. But based on the results of alpha,m-square and information ratio,I can say my portfolio outperformed and beat the market as these ratios are all positives.
  15. 15. Average Portfolio Return(Rp) 0.379247 Average Market Return(Rm) 0.36 β(portfolio) 0.039736 Active retun(Rp-Rm) 0.019247 Active retun(Rp-Rf) 0.373186 Active risk(Rp-Rm) 0.01361 Active risk(Rp-Rf) 0.263882 δ(market) 0.309119 Risk free 0.006061 CAPM 0.020125 Treynor ratio 9.391697 Sharpe 2.50852 Alpha 0.359122 M2 0.421493 information 1.414214 Adj. Sharp 1.414214 Minimizing risk under no short sale Above two tables are the output of excels under Minimizing risk under no short sale. We see that frow treynor,sharpe and adjusted sharpe ratio, it is not possible to say that my portfolio has beaten the market or outperformed the market. But based on the results of alpha,m-square and information ratio,I can say my portfolio outperformed and beat the market as these ratios are all positives.
  16. 16. Average Portfolio Return(Rp) 70% Average Market Return(Rm) 0.36 β(portfolio) 0.022898 Active retun(Rp-Rm) 0.34 Active retun(Rp-Rf) 0.693939 Active risk(Rp-Rm) 0.240416 Active risk(Rp-Rf) 0.490689 δ(market) 0.309119 Risk free 0.006061 CAPM 0.021951 Treynor ratio 30.30555 Sharpe 0.068132 Alpha 0.678049 M2 0.133226 information 1.414214 Adj. Sharp 1.414214 Minimizing risk under given return and short sale Above two tables are the output of excels under Minimizing risk under given return (70%) short sale. We see that frow treynor,sharpe and adjusted sharpe ratio, it is not possible to say that my portfolio has beaten the market or outperformed the market. But based on the results of alpha,m-square and information ratio,I can say my portfolio outperformed and beat the market as these ratios are all positives.
  17. 17.  The entire report shows a simple form of various available technical analysis used in the capital market. This portfolio can be extended by adding more assets in the portfolio and get better return with minimize the portfolio risk.  This report includes the stock dividend, cash dividend, and stock split and right share price adjustment. It uses some fundamental analysis. It major focuses on diversifications of portfolio.  Portfolio performance measures should be a key aspect of the investment decision process. These tools provide the necessary information for investors to assess how effectively their money has been invested (or may be invested). Remember, portfolio returns are only part of the story. Without evaluating risk-adjusted returns, an investor cannot possibly see the whole investment picture, which may inadvertently lead to clouded investment decisions.

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