435 Project

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES
North South University

School Of Business
FIN 435: Investment Theory

Section: 01
Summer 2015
ANALYSIS OF MARKOWITZ PORTFOLIO THEORY ON

DSE ENLISTED COMPANIES
Submitted By:
NAME
Muhammad Jubair
MD. Al Imran
Shaikh Mohammad Habib
Kazi Zishan Ul-Alam
MD. Abeer Hassan
ID
121 0490 030
122 0293 030
131 0297 630
113 0014 030
113 0506 030
Submitted To:
Muntasir Alam
Submission Date: August 19, 2015
1
ACKNOWLEDGEMENT
We would like to begin by thanking the Almighty for giving us the courage and the
perseverance to pursue the project and also the capability to have completed the task
successfully.
We are immensely grateful to our course instructor Mr. Muntasir Alam for his constant
encouragement, strong support, invaluable guidelines and suggestions that gave us the
confidence to work and the directions to finally accomplish the desired outcome.
Finally, we would like to thank each other for the wonderful cooperation we had shared
among ourselves as group members. Our dedication and strong teamwork has resulted in the
successful completion of this project. We learned extensively on real world implementation of
Markwoitz Portfolio Theory. This project has helped us to gain some knowledge and has
exposed some interesting answers.
August 19, 2015

Muntasir Alam
Lecturer
School of Business
North South University
Subject: Submission of Investment Theory Term Paper
Dear Sir,
We are submitting herewith our Term Paper entitled Markowitz Portfolio Theory On DSE
Enlisted Companies as per your instruction to fulfill the Investment Theory course requirement.
We have tried to prepare the project with due sincerity and we would like to thank you for giving
us the opportunity to have the chance to work on this. Despite some limitations we have tried our
best to address the major and in depth issues in making this project accurate and reliable.
Respectfully yours,
Muhammad Jubair
ID: 121 0490 030
MD. Al Imran
ID: 122 0293 030
Shaikh Mohammad Habib

ID: 131 0297 630
Kazi Zishan Ul-Alam

ID: 113 0014 030
MD. Abeer Hassan

ID: 113 0506 030
TABLE OF CONTENTS
Introduction
Executive Summary
Objectives
Research Methodology
Limitations
Company Overview
10
Fundamental Analysis of the Companies
13
Theoretical Background of Markowitz
18
Portfolio Theory
Portfolio Construction
19
Beta Calculation
27
Required Rate of Return
29
Conclusion
30
References
31
Appendix
32
INTRODUCTION
The objective of stock selection is to mainly: (1) Maximize the total return on investment for the
targeted holding period. (2) Minimize the risk (3) Maintain an appropriate degree of portfolio
diversification. One simple way to diversify a portfolio is to buy a stock from each of the sectors
that are widely referred to as broad sectors within the stock market. The stocks from these
sectors rise or fall in different times when the stock market advances or declines. In order to
create our diversified portfolio, we have picked stocks from five different sectors. These include
the Pharmaceuticals and Chemical industry, Food and Allied industry, Financial Institution,
Cement industry and Engineering industry. We have chosen stocks from these sectors to create
our portfolio because these industries have been experiencing growth over the last few years. A
local industry support policy and effective regulatory framework are the key reasons of success
of these industries. The overall outlook seems good and it is expected that these companies will
have a good growth of margin over the next few years. Also, these industries are achieving self
sufficiency and have been expanding both in local and international markets.
Many investors choose stocks only based on performance. Though past performance will not
always guarantee the future, but it is still worthwhile to evaluate investments based on their
ability to deliver consistent returns with minimal risk. Before selecting the stocks, we did the
fundamental analysis where we have calculated some key ratios of these companies. According
to the Lanka Bangla Securities analysis (2013), the best performing sector in 2013 was Food &
allied sector as it gave more than 90% return. Second highest major gaining sector was
Pharmaceuticals with a rise of almost 40%, Square Pharmaceuticals gained 57.9%. Olympic
5
Industries dominated the engineering sector with a gain of 124.5% in market capitalization.
Singer Bangladesh posted 42.3% return among engineering sector stocks. As, the banking sector
is incurring loss of capitalization; therefore we have chosen to invest in financial institution
sector instead of banking sector to minimize the risk. Besides, these companies posted consistent
net profit over the last few years and a huge amount of paid-up capital in the stock market. These
companies have given out steady dividends over the past couple of years and it is expected that
they will continue to do the same in the future.
EXECUTIVE SUMMARY
We have focused on implementing the Markowitz Portfolio Theory in this report using IDLC,
Square, Olympic, Heidelberg Cement and Singer BD stocks which are currently enlisted in the
Dhaka Stock Exchange. The report begins with selection of 5 stocks with the reasons behind
selecting those stocks and followed by a brief overview of the selected companies.
Arithmetic mean, geometric mean, and standard deviations of the five stocks as well as the
market are determined based on the daily returns of the past 10 years. The correlations and co
variances among the five stocks are also determined next. Then 10 portfolios were chosen and
each portfolio consists of two stocks. Risk and returns of those ten portfolios were calculated
using Markowitz Portfolio theory and risk-return trade off for those 10 portfolios are shown.
Also, efficient frontier was constructed by plotting the risk and returns of efficient portfolios.
We calculated betas of those five stocks and compared them with the betas already available in
the market. Then we calculated the required rate of returns of five stocks by using Capital Asset
Pricing Model and concluded the report.
OBJECTIVES
Recording the daily prices of Square Pharmaceuticals Ltd, Olympic Industry
Ltd, Heidelberg Cement Ltd, IDLC, Singer Bangladesh Ltd and DSE all shares
price index and calculating their daily returns based on closing price for the year
of 2003-2012.
Calculating the arithmetic mean return and standard deviation of these five
stocks and DSE all shares price index.
Calculating the correlation coefficient and covariance of theses five stocks with
each other and also with the market index.
Calculating the portfolio risk and return by using different combinations of the
five stocks and drawing an efficient frontier of the portfolios.
Calculating the beta of each stock and comparing the calculated beta with the
beta available on market data.
Calculating the required rate of return of each stock based on Capital Asset
Pricing Model (CAPM).
This evaluation will be very helpful for the potential investors to have a vast knowledge about
the portfolios and it will also help them to decide which company they should invest in.
7
Investment decisions are critical decisions and need thorough analysis. When making
investments, investors look for dividend paid by a company and the capital gain. That is why the
objective of any company is to maximize shareholders wealth. So throughout all the report,
starting from collecting of the data up to drawing the conclusion on the financial situation of
these stocks gives the knowledge and understanding of how it works in real finance world.
METHODOLOGY
Primary Data
No primary data was required to prepare this report because all of the relevant information was
available in secondary data sources.
Secondary Data
The report is prepared by using secondary data only and the sources of the data were Daily
Trading Information from 2003 to 2012, annual reports and relevant websites.
Key Information reflected in the overviews of the companies was obtained from the official
websites of the companies as well as the latest annual report of the companies.
Microsoft Excel 2007 spread sheet was used for calculation as well as creating diagrams.
LIMITATIONS
There were quite a few limitations while doing this project. Here are some of the general
limitations:
Access of Information:
One of the biggest limitations was the absence of a standard format of information. Specifically,
some of the market data were missing. For example, 2004 market data were missing. Therefore,
we failed to calculate the market return for 2004.
Stock Selection Factors:
We selected the stocks solely based on the performance of the company. Even though past
performance is worthwhile to evaluate investments, but it will not guarantee the future.
Therefore beside the performance of the company, we need to focus on other the macro
economic factors related to our investment.
Fundamental Analysis:
We selected our companies after doing the fundamental analysis only. We have chosen our
stocks based on certain key ratios. However, if we could do the technical analysis as well as
calculate the intrinsic value of the company, it will be more appropriate for evaluating the value
of stocks.
Our Personal Flaws:

As the report is huge and time were very short, there may be some mistakes in our calculation.
This may give rise to wrong understanding of actual performance of the portfolio.
COMPANY OVERVIEW
IDLC Finance Limited
IDLC is one of the largest Non-Bank Financing Institute in Bangladesh. they offers a wide range
of products and solutions comprising loans, deposit and capital market products and services to
corporate, consumer and SME clients. IDLC also operates two wholly-owned subsidiaries in the
capital markets through IDLC Investments Limited (providing merchant banking services) and
IDLC Securities Limited (providing brokerage services). Currently IDLC has 26 branches. IDLC
is listed on both Dhaka and Chittagong stock exchanges. The Companys market capitalization
stood at Taka 10,119 million as on31 December 2013. IDLC was initially established in
Bangladesh in 1985 through the collaboration of International Finance Corporation (IFC) of the
World Bank, German Investment and Development Company (DEG), Kookmin Bank and
Korean Development Leasing Corporation of South Korea, the Aga Khan Fund for Economic
Development, the City Bank Limited, IPDC of Bangladesh Limited, and Sadharan Bima
10
Corporation. Initial foreign shareholding of 49% was gradually withdrawn and the last foreign
shareholding was bought out by local sponsors in 2009.
Square Pharmaceuticals Limited

Square Pharmaceuticals Limited is the largest pharmaceutical company in Bangladesh and it has
been continuously in the 1st position among all national and multinational companies since 1985.
It was established in 1958 and converted into a public limited company in 1991. The sales
turnover of SPL was more than Taka 11.46 Billion (US$ 163.71 million) with about 16.43%
market share (April 2009 March 2010) having a growth rate of about 16.72%.Square
Pharmaceuticals Limited has extended its range of services towards the global market. It
pioneered exports of medicines from Bangladesh in 1987 and has been exporting antibiotics and
other pharmaceutical products.
Heidelberg Cement Bangladesh Limited

Heidelberg Cement Bangladesh Limited is a member of Heidelberg cement group, Germany.
This company came into Bangladesh in 1998. They have two reputed brand in the cement market
Ruby Cement and Scan Cement. Initially they started with a floating terminal in Chittagong.
Then they gradually have their own manufacturing facility. Now they have more than one
manufacturing facility in Bangladesh. 39 percent of their total share is to the general public and
other institutions.
11
Singer Bangladesh Limited

Singer Bangladesh is one of the oldest companies in Bangladesh. It was listed in Dhaka stock
exchange in 1983. During that time only 20 percent of its share was offered in the market. Now
its share is also traded in Chittagong stock exchange. Singer Bangladesh has a very diversified
product line. Initially it started as a sewing machine producer. But now it has many different type
of product. Its diversified product line include color televisions, fans, washing machines, irons,
microwave ovens, rice cookers, audio products, air conditioners, motorcycles, instant power
supply, DVD players, room heaters, kitchen appliances, net book, laptop, desktop computers,
generators, blue ray DVD players, LCD/LED TV and 3D television.
Olympic Industry Limited

Olympic Industries Limited is one of the longest running and most reputed manufacturing-based
companies in Bangladesh. Olympic Industries Limited has very diversified product line. It has
various consumer goods including biscuits, confectioneries, batteries, and ball pens as well as
Pharmaceuticals, Power, and Information Technology. Olympic Industries Limited is currently
the market leader in the biscuit market and second in position in the battery market in
Bangladesh. Olympic Industries Limited is a public listed company and is trading on the Dhaka
Stock Exchange and Chittagong Stock Exchange. Olympic Industries Limited also involved in
some CSR activity like Olympic scholarship program and Energy plus football tournament.
12
FUNDAMENTAL ANALYSIS OF THE COMPANIES
IDLC Finance Limited

Market Capital in BDT
10859.063 mn
Paid up Capital in BDT
2011.0 mn
Reserve & Surplus in BDT
3348.1 mn
Net Profit After Tax in

BDT
361.71 mn
Basic EPS in BDT
2.25
Current P/E Ratio
12.67
Share Percentage
Sponsor- 63.82%
Institution- 14.54%
Net Asset Value Per
Public-21.64%
% Dividend
Year
Share
Year End P/E
Yield
2012
37.93
20.74
N/A
2011
40.21
34.28
N/A
2010
61.5
34.67
0.75
2009
797.7
27.13
0.27
2008
644.52
14.86
0.66
13
Square Pharmaceuticals Ltd

135875.592 mn
4820 mn
15514.8 mn
Net Profit After Tax in BDT
4104.82 mn
Basic EPS in BDT
8.52
Current P/E Ratio
24.53
Share Percentage
Sponsor- 54.21%
Institution- 27.18%
Public-8.96%
% Dividend
Year
Net Asset Value Per Share
Year End P/E
Yield
2012
72.2
24.31
1.05
2011
81.375
26.6
0.92
2010
857.52
28.13
0.98
2009
905.05
23.44
1.36
2008
N/A
35.9
0.97
Heidelberg Cement Bangladesh Ltd.

33625.286 mn
14
565 mn
Reserve & Surplus in

BDT
5735.0 mn
Net Profit After Tax in

BDT
1474.08 mn
Basic EPS in BDT
26.09
Current P/E Ratio
23.48
InstitutionShare Percentage
Sponsor- 60.66%
20.58%
Net Asset Value Per
Public-18.76%
% Dividend
Year
Share
Year End P/E
Yield
2012
111.49
11.58
1.89
2011
93.13
19.28
1.76
2010
84.18
20.7
1.18
2009
703.05
14.29
1.77
2008
585.46
11.58
2.72
Singer Bangladesh Ltd.

10882.028 mn
491.0 mn
2048.7 mn
15
343.87 mn
Basic EPS in BDT
7.01
Current P/E Ratio
28.32
Share Percentage
Sponsor- 75%
Public-25%
% Dividend
Year
Net Asset Value Per Share
Year End P/E
Yield
2012
64.67
16.43
7.62
2011
55.99
28.23
1.04
2010
139.96
82.14
8.37
2009
481.68
24.42
3.22
2008
278.81
29.06
1.51
Olympic Industry Ltd

28762.520 mn
1175.0 mn
556.3 mn
615.36 mn
Basic EPS in BDT
3.45
Current P/E Ratio
46.7
Share Percentage
Sponsor- 31.49%
Institution- 30.31%
Public-27.45%
Foreign-10.75%
16
Net Asset Value Per
% Dividend
Year
Share
Year End P/E
Yield
2012
14.91
21.38
0.79
2011
14.23
38.82
0.53
2010
15
33.08
0.55
2009
183.15
11.32
1.59
2008
177.38
16.82
4.06
MARKET YIELD
Company
Last Price
Dividend Yield
Payout Ratio
Declaration(C)
IDLC
52.7
0.949 %
12.019 %
5%
SINGERBD
219.9
4.548 %
128.370 %
100 %
SQURPHARMA
278.7
0.897 %
22.462 %
25 %
HEIDELBCEM
612.7
6.202 %
166.302 %
380 %
OLYMPIC
244.7
0.409 %
12.739 %
10 %
17
THEORETICAL BACKGROUND OF MARKOWITZ

PORTFOLIO THEORY
Prior to 1950, people considered that they can reduce the risk by adding more and more
securities in a portfolio without any systematic manner. This was known as the insurance
principle. This theory tells us that each security is unique and by adding more securities the risk
of one security will be canceled out by other security. So by adding more security the risk of a
portfolio is reduced.
In 1950 Markowitz came with an idea that adding more security will reduce risk but it have to be
in a systematic manner. He told that risk in not only subject to weighted average risk of each
security but also subject to weighted co-movement of securities. The co-movement is the covariance of securities. Co-variance tells us the degree at which two variables are moving
together. Negative co-variance tells us that variables are moving in the opposite direction at the
same time. And positive co-variance tells us that two variables are moving in the same direction
at the same time. So when we are going to add any securities to the portfolio we should add
securities with negative or zero co-variance. If we add securities with positive co-variance that
will not reduce any risk of a portfolio. However to calculate the risk of a portfolio we have to
take the weighted average risk and the weighted average co-variance of the securities. And
weight of each security in a portfolio should be the market weight. The number of co-variance
one have to calculate for n number of securities is n(n-1). And this is a major problem for the
Markowitz theory, for a large portfolio investor has to calculate a large number of variances and
co-variances.
18
PORTFOLIO CONSTRUCTION
The following steps are taken to construct two stocks portfolio from the selected five stocks of
Dhaka Stock Exchange.
Calculating Daily Returns

We have calculated daily returns of each stock from the daily trading information from the year
2003 to 2012 (10 years).
Calculating Arithmetic Mean, Geometric Mean and Standard Deviation

Arithmetic mean is the average of all returns of a single stock and it is the expected next period
return of that particular stock. Geometric mean refers to the compounding growth rate of daily
return over the last 10 years of a particular stock. Standard Deviation refers to risk or fluctuation
of returns in last 10 years. Higher the value of standard deviation higher risk is associated with
the stock. We have calculated arithmetic mean, geometric mean and standard deviation of each
stock based on 10 years daily return. Microsoft Office Excel 2007 formulas were used for
calculation.
Stock & Market
Arithmetic Mean
Geometric Mean
Standard Deviation
IDLC
0.0047%
-0.1271%
4.0991%
Square
0.0264%
-0.0667%
3.1221%
Olympic
-0.1540%
-0.2728%
4.9012%
Heidelberg
-0.0555%
-0.1014%
3.2025%
Singer
0.0127%
-0.0903%
3.4966%
19
Market
0.0477%
0.0360%
1.5379%
Among the selected stocks Singer is expected to produce highest daily return and Olympic is
expected to produce lowest daily return. Olympic is also the most risky stock and Square
pharmaceuticals is the least risky stock among the chosen stocks.
Determining Correlation & Covariance

Correlation is the relationship (positive, negative or no relationship) in between two random
variables and covariance refers to the measure of how much two random variable will change
together.
We have calculated the correlations and co variances among the stocks based on 10 years daily
return. The correlation indicates the relationship of movement in between two random stocks and
covariance indicates the degree of change.
Correlations Matrix
IDLC
Square
Olympic
Heidelberg
Singer
IDLC
1.0000
-0.0104
-0.0194
0.0323
0.0122
Square
-0.0104
1.0000
-0.0100
-0.0462
-0.0331
Olympic
-0.0194
-0.0100
1.0000
-0.0251
0.0318
Heidelberg
0.0323
-0.0462
-0.0251
1.0000
-0.0050
Singer
0.0122
-0.0331
0.0318
-0.0050
1.0000
20
Table of Co variances
IDLC
Square
Olympic
Heidelberg
Singer
IDLC
0.001680
-0.000013
-0.000039
0.000042
0.000018
Square
0.000975
-0.000015
-0.000046
-0.000036
-0.000015
0.002402
-0.000039
0.000055
Heidelberg 0.000042
-0.000046
-0.000039
0.001026
-0.000006
0.000018
-0.000036
0.000055
-0.000006
0.001223
0.000013
Olympic
0.000039
Singer
By analyzing different correlations and co-variances among different stocks, we found that most
of the stocks have negative relationship with other stocks. So, our portfolio risks will be reduced
due to negative correlations and co-variances.
Determining Weight
We have constructed our set of portfolios by using two stocks in each portfolio. The weight of
each stock was determined by the percentage of its market weight to total market cap of two
stocks.
21
Portfolios
Stocks
Weights
IDLC
7.24%
Square
92.76%
IDLC
27.64%
Olympic
72.36%
IDLC
23.95%
Heidelberg
76.05%
Square
73.50%
Olympic
26.50%
Square
71.21%
Heidelberg
28.79%
Olympic
45.18%
Heidelberg
54.82%
Singer
51.71%
IDLC
48.29%
Singer
7.72%
Square
92.28%
Singer
29.03%
Olympic
70.97%
Singer
25.21%
Heidelberg
74.79%
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
Portfolio 6
Portfolio 7
Portfolio 8
Portfolio 9
Portfolio 10
22
Risk & Returns of Selected Stocks

The expected risk & return (daily basis) are shown in table below. Expected return is the
arithmetic mean of past 10 years daily return and risk is the standard deviation of the returns.
Stock
Return
Risk
IDLC
0.0047%
4.0991%
Square Pharma
0.0264%
3.1221%
Olympic
-0.1540%
4.9012%
Heidelberg
-0.0555%
3.2025%
Singer BD
0.0127%
3.4966%
Identifying Correlations & Co Variances of the Desired Portfolios

The correlation and covariance in between the stocks of each portfolio is shown below.
Portfolio
Correlation
Covariance
IDLC & Olympic
-0.0194
-0.000039
Olympic & Singer
0.0318
0.000055
Olympic & Heidelberg
-0.0251
-0.000039
IDLC & Heidelberg
0.0323
0.000042
Heidelberg & Singer
-0.0050
-0.000006
Square & Olympic
-0.0100
-0.000015
23
Square & Heidelberg
-0.0462
-0.000046
IDLC & Singer
0.0122
0.000018
IDLC & Square
-0.0104
-0.000013
Square & Singer
-0.0331
-0.000036
Most of the portfolios stocks in the above table consist of negative correlation as well as
negative covariance. So, the portfolio risk is supposed to be reduced due to negative relationship
in between the movement of returns of the stocks.
Determining Risk & Return of the Portfolios

We have calculated the daily expected risk and returns of each portfolio by using Markowitz
Model. Markowitz formulas are used to calculate expected risk & return of each portfolio.
Portfolio
Return
Risk
IDLC & Olympic
-0.1101%
3.7020%
Olympic & Singer
-0.1056%
3.6544%
Olympic & Heidelberg
-0.1000%
2.7911%
IDLC & Heidelberg
-0.0411%
2.6553%
Heidelberg & Singer
-0.0383%
2.5481%
Square & Olympic
-0.0214%
2.6255%
Square & Heidelberg
0.0028%
2.3672%
IDLC & Singer
0.0089%
2.6973%
IDLC & Square
0.0248%
2.9080%
24
Square & Singer
0.0253%
3.0028%
Constructing Efficient Frontier

Risk & Return Trade off Diagram
We have constructed a scattered diagram by using risk of each portfolio as horizontal axis
variable and return of each portfolio as vertical axis variable. The diagram gives us the risk and
return trade of all portfolios. The diagram is created by Microsoft Excel 2007.
Risk Return Trade off of all Portfolios

0.0400%
2.9080%, 0.0248%3.0028%, 0.0253%
Return (%)
0.0200%
2.3672%, 0.0028%
2.6973%, 0.0089%
0.0000%
0.0000% 0.5000% 1.0000% 1.5000% 2.0000% 2.5000% 3.0000% 3.5000% 4.0000%
-0.0200%
2.6255%, -0.0214%
-0.0400%
2.5481%, -0.0383%
2.6553%, -0.0411%
-0.0600%
-0.0800%
3.6544%, -0.1056%
-0.1000%
2.7911%, -0.1000%
3.7020%, -0.1101%
-0.1200%
Risk
The diagram above shows the risk and return trade off of all portfolios. However, there are only
four portfolios that belong to the efficient frontier.
25
Efficient Portfolios
Efficient Portfolios
Return
Risk
Square & Heidelberg
0.0028%
2.3672%
IDLC & Singer
0.0089%
2.6973%
IDLC & Square
0.0248%
2.9080%
Square & Singer
0.0253%
3.0028%
Efficient Frontier
We have constructed a scattered diagram by using risk of each efficient portfolio as horizontal
axis variable and return of each efficient portfolio. The diagram gives us the Efficient Frontier.
The diagram is created by Microsoft Excel 2007.
Efficient Frontier
0.0300%
3.0028%, 0.0253%
Return (%)
0.0250%
2.9080%, 0.0248%
0.0200%
0.0150%
0.0100%
2.6973%, 0.0089%
0.0050%
2.3672%, 0.0028%
0.0000%
0.0000%
0.5000%
1.0000%
1.5000%
2.0000%
2.5000%
3.0000%
3.5000%
Risk
26
Now we have an efficient frontier consisting of four portfolios. Only these four portfolios of ten
portfolios produce the optimal risk and return trade off and other portfolios produce lower
returns at assumed risk.
An investor may choose any of those 4 portfolios according to his or her risk and return
preference. In other words, an investor will match their Indifference Curve with this Efficient
Frontier to make an investment decision.
BETA CALCULATION
We have calculated Beta () of each stock by regression analysis in Microsoft Excel 2007. In the
regression analysis we have considered Daily Market Returns of past 10 years as horizontal axis
variables and Daily Stock Returns of past 10 years as vertical axis variables. To compare our
betas with betas calculated by experts, we have taken betas from www.stockbangladesh.com
website.
Stocks
Beta calculated by
Beta calculated by experts
us
IDLC
-0.01449923
1.04009418
Square
-0.01015178
0.61093204
Olympic
0.04118967
1.16839486
Heidelberg
0.01927099
0.88888641
Singer
0.07260845
0.96598688
27
Reason for Different Betas for Same Stock:

Calculation of Beta depends on variables. We have taken daily returns to calculate
the Beta. However, the expert may have used weekly, monthly or yearly return to
calculate beta. So, there must be difference in variables that led to different betas.
We have considered the returns from the year 2003 to the year 2012. Experts time
period may be different and that can be a reason for different betas.
Different Betas can be resulted from different Index which is compared with the
stocks returns. In our analysis we used total market index, but experts may have
used DSEX or the industry wise Index.
Beta of each stock changes with the financial performance of the company. So, Beta
value may have changed due to recent financial performance.
Measure of in this model is subject to error. In our beta calculation error is not
corrected.
28
REQUIRED RATE OF RETURN

We have used Capital Asset Pricing Model to calculate the required rate of return of the investors
for the five stocks. We are assuming 3% or risk free rate of return and 7% of market return.
Stock
Market
Risk
Beta
Beta
Required
Required Rate
Return
Free
calculated
calculated
Rate of return
of return based
Return
by us
by experts
based on our
on experts beta
beta
IDLC
7%
3%
-0.0145
1.040094178
2.9420%
7.1604%
Square
7%
3%
-0.0102
0.610932042
2.9594%
5.4437%
Olympic
7%
3%
0.0412
1.16839486
3.1648%
7.6736%
Heidelberg
7%
3%
-0.0193
0.888886414
2.9229%
6.5555%
Singer
7%
3%
0.072608
0.965986879
3.2904%
6.8639%
Required rate of return of each stock is subject to that particular stocks beta. Higher beta
produce higher required rate of return because the stock consists of higher systematic risk. In our
chosen stocks, Olympic has the highest rate of return and Square pharmaceutical has the lowest
rate of return. Difference in beta is the reason for different required rate of return.
29
CONCLUSION
The portfolios were constructed with proper diversification but, most of the portfolios failed
serve as efficient portfolios for investors. Constructing portfolios according to Markowitz model
has helped to reduce the risk of a portfolio but it also reduced the returns of some portfolios.
Thus, most of the portfolios are inefficient for the investors. Though, investors can meet their
investment objective by investing in four efficient portfolios that provide the optimal risk-return
combination.
Due to economic slowdown, systematic risk has risen significantly and returns of most of the
stocks are affected with the fluctuation of the market. As Markowitz Model does not consider the
systematic risk, Capital Asset Pricing Model can be very useful to design the portfolios because
the model considers the systematic risk associated with the stocks returns.
30
REFERENCE
IDLC Finance Limited. (n.d.). Retrieved April 15, 2014, from IDLC: http://idlc.com/
Square Pharmaceutical Limited. (n.d.). Retrieved April 20, 2014, from Square Pharmaceutical
Limited: www.squarepharma.com.bd
Heidelberg Cement Industries. (n.d.). Retrieved April 17, 2014, from Heidelberg Cements:
www.heidelbergcementbd.com
Singer Bangladesh Limited. (n.d.). Retrieved April 16, 2014, from Singer: www.singerbd.com
Olympic
Industtries.
(n.d.).
Retrieved
April
14,
2014,
from
www.olympicbd.com/index.php/about-company
Dhaka Stock Exchange. (n.d.). Retrieved April 24, 2014, from Dhaka Stock Exchange:
http://www.dsebd.org/
Sectoral
beta.
(n.d.).
Retrieved
April
25,
2014,
from
Stockbangladesh.com:
http://www.stockbangladesh.com/resources/sector_beta/
31
APPENDIX
32
FORMULAS USED FOR CALCULATIONS

We have calculated different values with the help of Microsoft Excel 2007 work sheet.
1. Daily Return:
2. Arithmetic Mean (average return): =AVERAGE (returns)

3. Geometric Mean of returns: =(PRODUCT(1+retrurns)^(1/COUNT(Returns)))-1
4. Standard Deviation: =STDEV (returns)
5. Correlation x,y : =CORR(Returns of X, Returns of Y)
6. Covariancex,y: Correlationx,ySigmaxSigmay
7. Calculation of Beta: Regression Analysis in excel. Taking Market return at horizontal axis and
Stock Return at vertical axis.
8. Portfoliox,y Weights:
Weightx =
Weighty =
9. Return of the Portfoliox,y = WxReturnx + WyReturny
Risk of the Portfoliox,y =
10. Required Rate of Return: Risk Free Return +(Market Return-Risk Return)
33
SECTOR INDEX
34
FUNDAMENTAL CHART
35
36
37
38
39
40
41
42

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ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

North South University

FIN 435: Investment Theory

ANALYSIS OF MARKOWITZ PORTFOLIO THEORY ON

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

August 19, 2015

Shaikh Mohammad Habib

Kazi Zishan Ul-Alam

MD. Abeer Hassan

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

Fundamental Analysis of the Companies

Theoretical Background of Markowitz

Required Rate of Return

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

Stock Selection Factors:

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

Our Personal Flaws:

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

Square Pharmaceuticals Limited

Heidelberg Cement Bangladesh Limited

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

Singer Bangladesh Limited

Olympic Industry Limited

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

FUNDAMENTAL ANALYSIS OF THE COMPANIES

IDLC Finance Limited

Paid up Capital in BDT

Reserve & Surplus in BDT

Net Profit After Tax in

Basic EPS in BDT

Current P/E Ratio

Net Asset Value Per

Year End P/E

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

Square Pharmaceuticals Ltd

Paid up Capital in BDT

Reserve & Surplus in BDT

Net Profit After Tax in BDT

Basic EPS in BDT

Current P/E Ratio

Net Asset Value Per Share

Year End P/E

Heidelberg Cement Bangladesh Ltd.

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

Paid up Capital in BDT

Reserve & Surplus in

Net Profit After Tax in

Basic EPS in BDT

Current P/E Ratio

Net Asset Value Per

Year End P/E

Singer Bangladesh Ltd.

Paid up Capital in BDT

Reserve & Surplus in BDT

ANALYSIS OF MARKOWITZ PORTFOLIO T HEORY ON DSE ENLISTED COMPANIES

Net Profit After Tax in BDT

Basic EPS in BDT

Current P/E Ratio

Net Asset Value Per Share