Assignment

On
Portfolio Management

Submitted To:
Md. Abdul Hannan Mia
Professor
Department of Management Information System
University of Dhaka

Submitted By:
Md. Nahidul Islam
ID: 024-085
Section: A
23rd Batch
Department of Management,
University of Dhaka

Date of Submission: January 17, 2021

 Part-2
Introduction

Concept of portfolio management

Portfolio management is the process of selecting and managing individuals’ investments effectively to
maximize their expected return within a given period and a minimum level of risk exposure.

The whole process relies on the skill to make appropriate decisions. the decision for making a lucrative
investment mix, assigning assets as per risk, and diversifying resources to reduce capital loss. Different
features of investment alternatives are analyzed and specify where to invest how much money to each of the
alternatives. Investing in more and more assets, with different features, diversifies the risk of a portfolio and
thus increases the surety of the returns.

Portfolio management generally works as a SWOT analysis of different investment alternatives. It helps to

make significant returns and save such returns against risks. Portfolio management needs the ability to
measure strengths, weaknesses, opportunities, and threats across the full range of investment alternatives. The
options include trade-offs, from debt versus equity to national versus international, and growth versus safety

Professional portfolio managers serve on behalf of clients when individuals may want to make and manage their
portfolios. The main goal of the portfolio manager is to maximize the expected return of the investment within
the least exposure to risk.
 Part-3

Process of portfolio management

The process of portfolio management has three major steps of planning, execution, and feedback.

Planning

This is the basement of the whole process. It describes what and how to be done in the process:

1. Identification of goals and limitations: The identification of the client’s investment goals, and any
constraints is the main task in the planning phase. The investment goal is the expected outcome of the
clients about return and risk. Any constraints on the investment selection are the limitations. Both are
identified in this phase.
2. Investment Policy Statement: investment policy statement is the drafted document between the
portfolio manager and investor that contains the investor’s general objectives and strategies the portfolio
manager is going to apply to achieve those objectives. It is the second phase in the planning stage.
3. Expectation about the capital market: In this step, the expectation about the capital market is made.
Risk and return of different assets projected over the long term to select portfolios that either maximize
the desired return for specific levels of risk or minimize the portfolio risk for specific levels of desired
return.
4. Strategic Asset Allocation: Strategic asset allocation is a portfolio strategy that helps the client set
target allocation for different asset alternatives. The target allocation depends on a few factors like the
client’s risk tolerance, time frame, and investment goals. This task is done by combining the investment
policy statement and expectations regarding the capital market.

Execution

This step is most important, and much caution is needed to do this step. This section consists of two subtasks.

1. Selecting a portfolio: The expectation of the capital markets is adjusted with an investment allocation
strategy to select suitable assets for the investor’s portfolio. The portfolio optimization technique is used
by the portfolio managers to decide the portfolio mix for the clients.
 2. Implementing portfolio: Once the portfolio composition is finished, the portfolio is executed. Portfolio
executions are equally important as high transaction costs can decline the performance of the portfolio.
Transaction costs include both explicit costs like taxes, fees, commissions, etc., and implicit costs like
opportunity costs, market price impacts, etc. Hence, the execution of the portfolio needs to be
appropriately timed and well-managed.

Feedback

After the portfolio has been constructed, it needs to be reviewed and monitored at regular intervals. The
feedback stage has the following two sub-components:

1. Portfolio Monitoring and Rebalancing: The portfolio manager needs to control and evaluate the risk
of the portfolio and compares it with the strategic asset allocation. This is necessary to ensure that
investment goals and limitations are being achieved. The manager oversees the client’s circumstances,
economic status, and market conditions. If the investor’s circumstances change, then a review of the IPS
and the portfolio may be required. Portfolio rebalancing should also consider taxes and transaction costs.
2. Performance Measurement and Reporting: The investment performance of the portfolio must be
evaluated regularly to ensure whether the client’s objectives have been achieved. Both absolute returns
and relative returns can be used as a benchmark of performance while analyzing the performance of the
portfolio.
 Part-4 & 5

Mr. Niloy is an investor, and he is going to invest by making portfolio. He has a database of
stock of 3 firms where he is planning to invest. With the information given below he is
making a portfolio named Buzzfolio.

Portfolio Analysis Stock Database

Economic Stocks Probabilities Market

Conditions return
Opsonin Aristo Globe biotech
pharma pharma
Recession 8% 9% 11% 0.30 12

Normal 17% 11% 14% 0.40 13

Good 15% 16% 19% 0.50 16

The risk-free return of these stocks is 5%.

Now, he is finding out the answers to the few questions:

(i) What is the expected rate of return of each stock?

Answer (i): We know,

Expected Rate of Return ( Ŕ ) = P1R1+P2R2+……+PnRn

Thus,

( Ŕ)op = (0.08 x 0.30) +(0.17 x 0.40) +(0.15 x 0.50)

=0.167 or 16.7%
 ( Ŕ) AP = (0.09 x 0.30) + (0.11 x 0.40) + (0.16 x 0.50)

= 0.151 or 15.1%

( Ŕ) GB = (0.11 x 0.30) +(0.14 x 0.40) +(0.19 x 0.50)

=0.184 or 18.4%

Q. ii) What will be the standard deviation of each stock?

Answer (ii): We know,

SD (σ) = √ ❑ ( Rate of return−Expected Return ) 2 x Probability

Thus,

SD (σ) of Opsonin pharma = (0.08- 0.167)2 0.30+ (0.17-0.167)20.40+ (0.15-0.167)20.50

σ=√ 0.00732

=0.0855 or 8.6%

SD of Aristo pharma = (0.09-0.151)20.30+( 0.11-0.151)20.40+(0.16-0.151)20.50

σ=√ 0.00183

=0.0427 or 4.3%

SD of Globe Biotic = (0.11-.184)2.30+(0.14-0.184)2.40+(0.19-.184)2.50

σ= √ 0.00244

=0.0493 or 4.9%

Q. iii) What will be the co-variances & co-efficient of co-relations between each pair?

Answer(iii):

Covariances between Opsonin Pharma & Aristo Pharma = ⅀ (A 1- Á 1) (A2- Á 2) P

= {(0.08- 0.167) (0.09-0.151) (.30) + (0.17-0.167) (0.11-0.151) (.40) +(0.15-0.167) (0.16-0.151)

(.50)} = -0.010978
Thus, the covariance between Opsonin Pharma & Aristo Pharma is -0.010978

Covariances between Aristo Pharma and Globe Biotic = ⅀ (A1- Á 1) (A2- Á 2) P

= {(0.09-0.151) (0.11-.184) (.30) + (0.11-0.151) (0.14-0.184) (.40) + (0.16-0.151) (0.19-.184)

(.50)}

=0.011051

Thus, Covariances between Aristo Pharma and Globe Biotic is 0.011051

Covariances between Globe Biotic & Opsonin Pharma = ⅀ (A 1- Á 1) (A2- Á 2) P

= {(0.11-.184) (0.08- 0.167) (.30) + (0.14-0.184) (0.17-0.167) (.40) +(0.19-.184) (0.15-0.167)

(.50)}

= -0.008449

Thus, the Covariances between Globe Biotic & Opsonin Pharma is -0.008449

Answer (iv): Calculation of Co-relation between each pair:

We know,

Coefficient of co-relation = (Co-variance of 1,2) /(σ1σ2)

Thus, Coefficient of co-relation between Opsonin & Aristo pharma = {-0.010978/ (.0855 x
0.0427)}

= -0.3007

Coefficient of co-relation between Aristo pharma & Globe biotic = {0.011051 / (0.0427 x
0.0493)} = 0.5276

Coefficient of co-relation between Globe biotic & Opsonin pharma: = {-0.008449 / (0.0493 x
0.0855)

=-0.2005
Answer (v): Calculation of risk premium of each stock:

We know,

Risk Premium= ẞ (Rm - Rf)

Here,

ẞ= Beta: Rm= Market Return: Rf= Risk Free Return.

Given that,

Beta of Opsonin pharma = 1.2

Beta of Aristo pharma= 0.6

Beta of Globe biotic= 1.1

Thus, the risk premium of Opsonin pharma = 1.2(12 – 5) = 8.4%

The risk premium of Aristo pharma = 0.6 (13 – 5) = 4.8%

The risk premium of Globe biotic = 1.1 (16 – 5) = 12.1%

 Part-6
Evaluation of the performance of the portfolio

 Sharpe index = E(R)- RFR/ σ

Stock A=16.7-5 /8.6

=1.63

Stock B= 15.1-5 /4.3

=2.35

Stock C=18.4-5 /4.9

=2.73

Stock A has lower risk than others

 Treynor index= E(R)- RFR/ ẞ

Stock A=16.7-5 /1.2

=9.75

Stock B= 15.1-5 /0.6

=16.83

Stock C=18.4-5 /1.1

=12.18

According to Treynor index portfolio with higher value are preferred, so stock B is preferable
here.
                              Part-7
Statement of knowledge and reflection

I came to know about many unknown things by doing this assignment. While doing this
assignment I carried some research about the stock market and make a portfolio about investing
in the stock. For constructing the portfolio, I have chosen three popular stocks while selecting
them I came to know about the stock market and its activities. 
By this assignment, I know about various data collection methods and how they can be used in
constructing a portfolio. This assignment also increases my analytical ability in solving any
mathematical problem related to the stock market. I have analyzed some case studies and
research papers while doing this assignment. 
I flourish my skill and explore my internal ability to conduct any research and reach a solution.
This assignment helps me to unleash my true potentiality and use them in real life. This
assignment will help me to conduct my future research and I will learn many things from the
mistake of my assignment. 
This assignment will also be helpful for me if I will take any decision to invest in the stock
exchange. This assignment taught me how to reduce the risk of any investment and make the
investment profitable by constructing a portfolio. 
Overall making this assignment is to help me to gain experience and it is sometimes challenging
for me to collect data from various sources. While taking the decision I am getting a little bit
confused but finally, I was able to reach a solution and complete this assignment successfully. 
                                 
 Part-8

References, Assumptions, Table:

Frank k. Reilly Keith C. Brown, F., 2015. Analysis Of Investment And Management Of Portfolios. Texas:
South western.
1.DSE website
2.Other sources like hand notes, internet, and websites.
 Part-9
Non-plagiarism declaration

I clarify that this assignment is my work, based on my study and research that I have
acknowledged that all materials and sources used in this assignment whatever the books,
journals, articles, reports, lecture notes, and any kind of document is collected through my
communication. I also clarify that this assignment is not previously been submitted for
assessment in any other units, or any other places. I acknowledge that copying someone else
assignment or part of its wrong and submitting someone’s identical work to another constitutes
a form of plagiarism. I also acknowledge that the incorporation of materials from other works
and paraphrase of such materials without acknowledgment will be treated as plagiarism. I
acknowledge that I have followed the code of conduct of the assignment and I read the course
instructor given the assignment brief properly.