1) The document analyzes portfolio options for 5 Bangladeshi companies from different industries to find a combination that reduces risk while ensuring adequate returns. 2) It calculates the correlation, covariance, beta, and expected returns of the companies using the Capital Asset Pricing Model to determine their risk profiles. 3) Based on the efficient frontier graph, it recommends portfolios with weightings of 40-60% and 69-69.35% as offering the most lucrative risk-return tradeoffs.

1. FALL 2015
FIN 435.2: INVESTMENT THEORY
GROUP PROJECT on PORTFOLIO ANALYSIS
Prepared For:
MUNTASIR ALAM (MTA)
Department of Accounting & Finance
School of Business & Economics
North South University
PREPARED BY
Name ID
Noushin Nusrat 1220121030
Anzir Jahan Bari 1211309030
Fahim Ahmed Cowdhury 121 0445 030
Sadi Mohammed Tarif 1421569020
Introduction

2. The Bangladesh stock market has undergone various hurdles. Alternately, investors often do
not exercise rational thinking when selecting their portfolios. This project was conducted
with the purpose of developing a portfolio of 5 common stocks to derive a feasible and
logical pair that reduces risks and ensures adequate returns to the stockholders. This was
backed up with proper forecasts and interpretations.
Reason of choosing following companies:
These companies are selected because they belong to different industries and they have
different risk and return. The industries to which it belongs are footwear, textiles, ceramics,
paints and chemical. These stocks are also very volatile and are having a wide range of return
over the period of our analysis.
2. Company Profile Analysis:
2.1 Apex Footwear Limited:
Apex Footwear Limited (AFL) is the leading manufacturer and exporter of leather footwear
from Bangladesh to major shoe retailers in Western Europe, North America and Japan. The
company has revenues of USD 150 million in 2014. Public listed and traded since 1993, AFL
is professionally managed, currently employs over 9,000 persons and is in full compliance
with Corporate Governance Compliance Report under Section 2CC of the Securities
Exchange Commission Notification Order.
2.2 SQUARE TEXTILES LIMITED:
Square textile limited is a public limited company registered with Dhaka stock Exchange.
The group owns five units of spinning mills and twisting mill. Its major line of business and
operations are related with manufacturing & marketing of Yarn.
2.3 MONNO CERAMICS LIMITED:
Monno Ceramic Industries began producing porcelain tableware for the Bangladesh home
market in 1985, and secured its first export order the following year. Monno Ceramic soon
earned an enviable reputation for both quality and value. The subsequent introduction of bone
china to its range of quality dinnerware has only served to strengthen that reputation. Today

3. in Bangladesh Monno Ceramic is a household name and regarded as one of the country’s
premier companies.
2.4 BERGER PAINTS LIMITED:
Berger Paints is one of the oldest names in the paint industry, yet, it is one of the most
technologically advanced companies in the country. It is constantly striving for innovating
superior quality products and services. With more than 250 years of rich heritage, Berger
manufactures world class paints for all kinds of substrates and also provides unparallel
services.
2.5 ACI LIMITED:
ACI's mission is to achieve business excellence through quality by understanding, accepting,
meeting and exceeding customer expectations. ACI follows International Standards on
Quality Management System to ensure consistent quality of products and services to achieve
customer satisfaction. ACI also meets all national regulatory requirements relating to its
current businesses and ensures that current Good Manufacturing Practices (cGMP) as
recommended by World Health Organization is followed properly.
The detailed calculation of weekly return, annual return, average return, standard deviation,
and variance is as per the sheet attached. Correlation coefficient and Covariance of these
stocks with each other and also with DSEX is also as per the details attached.
Correlation and Covariance:
Initially a 10 – year analysis of the selected stocks have been done in order to derive a base
for projecting the relations between the individual stocks.
This interrelationship between stocks was observed through the calculation of:
1) Correlation and, 2) Covariance
These can be seen from the tables below:

4. Correlation Matrix
Name of
Company
APEXFOOT SQUARETEXT MONNOCERA BERGERPBL ACI DSEX
APEXFOOT 1 0.133580587 0.289727102 0.197035247 0.17560779 0.317688695
SQUARETEXT 0.133580587 1 0.370466286 0.008369327 -0.219331438 0.435044546
MONNOCERA 0.289727102 0.370466286 1 0.058287371 -0.188919434 0.338105944
BERGERPBL 0.197035247 0.008369327 0.058287371 1 0.556501928 0.370359161
ACI 0.17560779 -0.219331438 -0.188919434 0.556501928 1 0.171051258
DSEX 0.317688695 0.435044546 0.338105944 0.370359161 0.171051258 1
As per the laws of correlation, a portfolio is best diversified when stocks with negatively
correlation are combined. This minimizes the overall risk so that a possible gain in one
section offsets a loss in another and thereby preserves the stockholder’s interests.
Here we can see that ACI is negatively correlated with both Monno Ceramics and Square
Textiles. To determine which more beneficial option is we can use the concept of
Covariance.
Covariance Matrix
Name of
Company
APEXFOOT SQUARETEXT MONNOCERA BERGERPBL ACI DSEX
APEXFOOT 0.4955955 0.0425731 0.1455090 0.0705015 0.1350883 0.0594285
SQUARETEXT 0.0425731 0.2049545 0.1196505 0.0019258 -0.1085025 0.0523350
MONNOCERA 0.1455090 0.1196505 0.5089489 0.0211350 -0.1472733 0.0640943
BERGERPBL
0.0705015 0.0019258 0.0211350 0.2583340 0.3090777
0.0500200
ACI 0.1350883 -0.1085025 -0.1472733 0.3090777 1.1940444 0.0496668
DSEX 0.0594285 0.0523350 0.0640943 0.0500200 0.0496668 0.0706088
Covariance identifies the strength of relationship between any 2 stocks. In this case, ACI
stocks show negative correlation with both Square and Monno Ceramics. However, ACI
stocks have a stronger negative correlation with Monno Ceramic’s stocks relative to Square
Textile’s stocks (-0.1472733 compared to -0.1085025).
As such, the presence of negatively correlated stocks certainly helps to diversity the portfolio
and get the highest return for a particular risk.
Portfolio Risk and Return

5. In order to find out various arbitrary weights to be assigned to each of the 5 stocks that will
make up the efficient portfolios, we used the Excel tool “Solver”. The returns and risk
associated with each portfolio was then plotted to produce the efficient frontier.
In the figure above, the vertical axis represents the Total Returns from the portfolio while the
horizontal axis represents Total Risk of the same portfolio.
From the attached Excel sheet, each portfolio 1-10 is a combination of the 5 stocks we have
chosen by assigning different weights. Based on their individual positions on the efficient
frontier, we believe combinations with 40%, 50%, 60%, 69% and 69.35% to be the most
lucrative stocks to invest in and hold in a portfolio. Combination with 69.35% shows the
stocks offering the highest returns for the highest risk assumed.
It may be noted how combinations with returns below 30% were not included although they
are very close to the efficient frontier. This is because at their levels of risk, there are already
existing portfolios that offer higher returns as can be seen from the diagram.
Beta Comparison
The beta of market is taken as 1. If the beta of the stock is less than 1 then it shows that the
risk of the stock is less than the market. Further it shows that stock is less volatile and less
risky. If the Beta of the stock is more than 1 it is more volatile and risky stock. The beta of
the companies is as follows:
Company Beta as calculated Analysis

6. APEX
FOOTWEAR
0.841658512 The risk of the company is less than 1, this shows that stock
price is less volatile than market, for the data used.
SQUARE
TEXTILES
LIMITED
0. 741195721 The risk of the company is less than 1, this shows that stock
prices is less volatile than market for the data used. It indicates
that lower the risk lower than return.
MONNO
CERAMICS 0.907737638
The risk of the company is less than 1, this shows that stock
price is less volatile than market, for the data used.
BERGER
PAINTS
LIMITED
0.708409392
The risk of the company is less than 1, this shows that stock
prices is less volatile than market for the data used. It indicates
that lower the risk lower than return
ACI
0.703407451
The risk of the company is less than 1, this shows that stock
prices is less volatile than market for the data used. It indicates
that lower the risk lower than return.
Capital Asset Pricing Model (CAPM)
Having attained the respective Betas, CAPM was developed for individual stocks which are
displayed in the following table:
Return on stock = Risk free rate + Beta (Return on market- Risk free rate of return)
=Risk free rate + Beta*Risk premium
Name of
Company
Rf Rp Beta
Expected Return based
on CAPM
APEXFOOT 0.03 0.07 0.841658512 8.892%
SQUARETEXT 0.03 0.07 0.741195721 8.188%
MONNOCERA 0.03 0.07 0.907737638 9.354%
BERGERPBL 0.03 0.07 0.708409392 7.959%
ACI 0.03 0.07 0.703407451 7.924%
As per the common rule, the greater the risk, greater will be the expected return. This is
evident in case of Monno Ceramic’s stocks, which have the highest risk as denoted by a Beta
of 0.91 and a return of 9.35%. The same is more or less observed in case of the remaining
stocks.

7. From the table it is obvious that Apex and Square’s stocks possess the 2nd
and 3rd
highest
returns. Therefore, it is well justified in terms of expected returns that it pays investors to
keep a portfolio comprising of Monno Ceramic and Apex or Monno Ceramic and Square’s
stocks.
Conclusion
From our analysis, we recommend that portfolios that lie on the efficient frontier will give us
the best yield in comparison to risk associated with the portfolio. High risk averse investors
will pursue portfolios with less risk (which will yield lower return) and low risk averse
investors will pursue portfolios with higher risk (which will yield higher return).
However the analysis was only an estimate and even the most accurate model is prone to
external forces so there is no hard and fast rule of drawing such a conclusion.