Dynamic

Part: 2

Overview of Dynamic Asset allocation

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2.1 Asset allocation-a new dimension to portfolio performance

Different persons have different portfolio management needs, some want to maximize

the return, some want to minimize risks with steady investment growth, some want

constant earnings, and some others want to earn more spending least time. Dynamic

asset allocation is one such portfolio management strategy which aims at maximizing

the portfolio return by active management of portfolio components.

To construct an asset allocation portfolio, one invests among various asset classes,

such as stocks, bonds, cash and others. The returns of the asset classes tend to be

affected by different factors and thus, face different risks. Establishing an appropriate

asset mix is a dynamic process, and it plays a key role in determining portfolio’s

overall risk and return. A very important asset allocation strategy is dynamic asset

allocation, with which investor constantly adjusts the mix of assets as markets rise and

fall and the economy strengthens and weakens.

Unlike two other popular portfolio management strategies, strategic and tactical asset

allocations strategies, dynamic asset allocation does not involve keeping a fixed

investment ratio. Dynamic investors diversify their investments by investing in

equities, mutual funds, index funds, currencies, derivatives and fixed income

securities. They buy instruments which are rising (or are predicted to rise) and they

sell instruments which are falling (or are predicted to fall). Although not common,

many dynamic investors keep a reasonable proportion between high-return/high-risk

instruments such as stocks and low-return/low-risk instruments such as treasury

bonds.

Evaluation of current trends and prediction of future trends on investments are very

important with dynamic asset allocation. Investors can use a range of technical and

fundamental analysis tools for this purpose. Successful dynamic investors are those

who make right buy and sell decisions at right time. There are a few different

strategies of establishing asset allocations, and there are outlined some of them and

examined their basic management process.

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Strategic Asset Allocation

Strategic asset allocation is a method that establishes and adheres to what is a 'base

policy mix'. This is a proportional combination of assets based on expected rates of

return for each asset class. For example, if stocks have historically returned 10%

per year and bonds have returned 5% per year, a mix of 50% stocks and 50% bonds

would be expected to return 7.5% per year.

Constant-Weighting Asset Allocation:

Strategic asset allocation generally implies a buy-and-hold strategy; even as the shift

in the values of assets causes a drift from the initially established policy mix. For this

reason, may choose to adopt a constant-weighting approach to asset allocation. With

this approach, portfolio can be rebalanced. For example, if one asset were declining

in value, would be purchase more of that asset, and if that asset value should increase,

would sell it. There are no hard-and-fast rules for the timing of portfolio rebalancing

under strategic or constant-weighting asset allocation. However, a common rule of

thumb is that the portfolio should be rebalanced to its original mix when any given

asset class moves more than 5% from its original value.

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Strategic

Asset Allocation Strategy

Constant-weighted

Tactical

Dynamic

Insured

Integrated

Tactical Asset Allocation

Over the long run, a strategic asset allocation strategy may seem relatively rigid.

Therefore, it may necessary to occasionally engage in short-term, tactical deviations

from the mix in order to capitalize on unusual or exceptional investment

opportunities. This flexibility adds a component of market timing to the portfolio,

allowing you to participate in economic conditions that are more favorable for one

asset class than for others. Tactical asset allocation can be described as a moderately

active strategy, since the overall strategic asset mix is returned to when desired short-

term profits are achieved.

Insured Asset Allocation

With an insured asset allocation strategy, establish a base portfolio value under which

the portfolio should not be allowed to drop. As long as the portfolio achieves a return

above its base, try to increase the portfolio value as much as possible. If, however, the

portfolio should ever drop to the base value, invest in risk-free assets so that the base

value becomes fixed.

Integrated Asset Allocation

With integrated asset allocation there are considered both economic expectations

and your risk in establishing an asset mix. Integrated asset allocation, on the other

hand, includes aspects of all strategies, accounting not only for expectations but also

actual changes in capital markets and risk tolerance.

Dynamic Asset Allocation

Another active asset allocation strategy is dynamic asset allocation, with which

investor constantly adjusts the mix of assets as markets rise and fall and the economy

strengthens and weakens. With this strategy investor sell assets that are declining and

purchase assets that are increasing, making dynamic asset allocation the polar

opposite of a constant-weighting strategy. For example, if the stock market is showing

weakness, one sell stocks in anticipation of further decreases, and if the market is

strong, one purchase stocks in anticipation of continued market gains.

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2.2 Importance of dynamic asset allocation

A number of factors make dynamic asset allocation a viable strategy:

The cyclical moves of financial markets:

Over a century of market history has clearly shown that dissimilar investment

categories behave differently at different times in the economic cycle. The dynamic

asset allocation’s challenge is to use technical and/or fundamental analysis to attempt

to identify where the cycle are existed and what investment categories appear to have

the strongest potential for appreciation.

Chart Source: Martin J. Pring, International Investing Made Easy, McGraw-Hill, New York, 1981, p. 20.

Increase in returns utilizing efficient investing

decision:

This is a key reason that dynamic asset allocators do not have to be 100% right to

produce higher risk-adjusted returns. It is not uncommon for top-performing sectors to

experience advances of 50% or more annually. While the downside risk of some

market sectors makes investing in these areas potentially dangerous in a fixed asset

allocation strategy, dynamic asset allocation can harness their positive features and

energize investor portfolios.

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Efficiency of the strategy with mutual funds:

Using mutual funds in a dynamic asset allocation strategy further reduces risk by

providing instant diversification across hundreds of securities within each asset class

and allowing investors to move assets overnight between funds with little or no cost.

Existence of Bear markets:

Properly implemented, a dynamic asset allocation strategy should lessen an investor's

exposure to declining markets, blunting the impact of bear markets and preserving

capital the majority of prior gains. The more investors lose money in a down market,

the more they lose valuable time and opportunity.

Importance of technology:

Computers and on-line databases have given investment managers powerful tools for

analyzing the market and developing complex dynamic allocation models. By back

testing these models against historical data, dynamic asset allocators have developed

parameters and models, which indicate the asset classes that appear to be in sustained

upward trends and should surpass other investments in the current market climate.

Given a working knowledge of the markets and cycles, today's allocator can track a

multitude of indicators to determine what people are doing in the market and which

actions or data signal a fundamental change in economic climate. After weighing the

attractiveness of different asset classes, the money manager develops an asset

allocation strategy, which distributes monies among different funds/asset classes

based on return probabilities. When the asset allocation model indicates changes in

the attractiveness of an asset class, monies are moved to different funds.

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2.3 Goals of dynamic asset allocation

Reducing risk & achieving higher risk adjusted

return

The objective of dynamic asset allocation is to reduce the risk or fluctuation in the

value of an investor's account while achieving higher returns than other investments

with similar risk. The success of a dynamic asset allocation approach depends upon

the ability of the investment advisor to identify those asset classes achieving the

highest returns in each market phase. Not every investment decision will be perfect,

but over a full market cycle, a dynamic asset allocation approach offers the potential

for superior risk-adjusted results, outperforming the impact of taxes and inflation, and

leaving the investor with real growth.

Reducing risk without sacrificing performance

Dynamic asset allocation, like a "fixed" asset allocation strategy, seeks to reduce risk

through diversification among different investment categories. Using dynamic asset

allocation, however, the investor selects or weights investments based on those

categories with the greatest potential for superior returns, given current market

conditions. The allocation of assets becomes dynamic -- changing in response to

market conditions and perceived opportunities for profit. In studies of the

performance of money managers, asset allocation decisions, rather than individual

stock selection, have been shown to account for 80 to 90% and more of a portfolio's

performance. Top performing managers are those who are invested in the best

performing asset classes during different periods of the market.

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2.4 Benefits of dynamic asset allocation

The practice of dynamic asset allocation (also called tactical or active asset

allocation) has grown in recent years due to the success of various computerized

market-timing techniques in analyzing market trends. These new technologies

typically do not predict future market movements as much as they identify changes in

trend direction and evaluate the risk of changes in a trend. With this advanced

technology, the asset allocation practitioner can respond dynamically to the market

and significantly increase risk-adjusted return over time by:

Avoiding bear markets and periods of under-performance in the various asset

classes--either by reducing or eliminating the allocation of the under-

performing asset (e.g., getting out of the market).

Increasing the allocation of asset classes currently in bull markets that are

over-performing.

Dynamic asset allocation eliminates the key weakness found in the traditional,

fixed approach that routinely allows periods of under-performance.

The portfolio mix of our generic Model Portfolios will shift dynamically over

time to avoid periods of under-performance and move into investment types

that are performing well. The net effect is reduced losses, lower volatility,

higher average returns and a much stronger risk-adjusted return.

Dynamic approaches to asset allocation are inherently more efficient than the

traditional, fixed approach. They can significantly boost returns over time by quickly

reacting to changing market conditions for various asset classes and sectors, capturing

periods of over-performance and avoiding periods of under-performance.

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2.5 Dynamic trading strategy: Portfolio

Insurance

Portfolio insurances a dynamic trading strategy designed to protect a portfolio from

market declines while preserving the opportunity to participate in market advances.

Several portfolio insurance methods exist and are used in practice. The best-known

strategy involves trading in “real” or “synthetic” options. With the introduction of

exchange-traded index put options, it seemed theoretically possible for an investor to

use these contracts to insure well-diversified portfolios, especially index funds. For

some reasons, most investors prefer not to use the option market for insuring the

portfolios. Hence it calls for the dynamic trading strategy replicating the option

strategy to insure the portfolio. In this strategy the manager replicates an option

through a process of continually revising, in a prescribed manner, the proportions of a

portfolio consisting of the underlying the asset and the risk-less asset. Besides, the

complex nature of the underlying option pricing theory , the dynamic strategy calls for

buying more stock when the market is going up and selling off some stock as the

market goes down.

The basic dynamic trading approach involves replicating the insured portfolio’s price

with an ever-changing combination of positions in the underlying portfolio and the

risk less asset. The proportions allocated to the underlying portfolio and the risk less

asset change every period, so that the dynamic insurance strategy requires a

significant amount of trading. We will see in the report that how the same replication

is accomplished (approximately) with either a stock portfolio and short futures

positions or the risk less futures.

The number of units of the underlying portfolio that must be held long at any given

moment will be given by the call option’s “delta”, the reciprocal of how many calls it

takes to hedge a unit of the underlying portfolio. The call delta tells us the number of

units of the underlying portfolio to hold. The amount of the risk less asset to hold is

determined by subtracting the value of the held units of the underlying portfolio from

the total value of the insured portfolio.

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Part: 3

Market and economy Analysis

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3.1 The process of stock selection

To apply dynamic asset allocation on real data, 5 stocks need to be selected which

will be counted as risky asset and treasury bill will be counted as risk free asset. The

process of choosing the stocks has been done in 3 steps-

A. Economy analysis,B. Industry analysis,

C. Company analysis.

3.2 Economy and market analysis

At April 2010, USA – based ratings agency Standard & Poor's (S&P) awarded Bangladesh a BB- for a long term in credit rating which is below India and well over Pakistan and Sri Lanka in South Asia. And, despite continuous domestic and international efforts to improve economic and demographic prospects, Bangladesh remains a developing nation. However, Bangladesh is trying to decrease its dependency on foreign grant and loan.

Although two-thirds of Bangladeshis are farmers, more than three quarters of Bangladesh’s export earnings come from the garment industry, which began attracting foreign investors in the 1980s due to cheap labor and low conversion cost. In 2009–10 fiscal years the industry exported US$ 12.6 billion worth of products where in 2002 the exported amount was US$ 5 billion. Recently Bangladesh has been ranked as the 4th largest clothing exporter by the WTO (The World Trade Organization). whereas, according to The Economist Bangladesh is world’s third-largest clothes-export industry The industry now employs more than 3 million workers, 90% of whom are women. A large part of foreign currency earnings also comes from the remittances sent by expatriates living in other countries.

Obstacles to growth include frequent cyclones and floods, inefficient state-owned enterprises, mismanaged port facilities, a growth in the labor force that has outpaced jobs, inefficient use of energy resources (such as natural gas), insufficient power supplies, slow implementation of economic reforms, political infighting and corruption. According to the World Bank, "among Bangladesh’s most significant obstacles to growth are poor governance and weak public institutions." Despite these hurdles, the country has achieved an average annual growth rate of 5% since 1990, according to the World Bank.

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http://en.wikipedia.org/wiki/Political_corruption

http://en.wikipedia.org/wiki/Natural_gas

http://en.wikipedia.org/wiki/Port

http://en.wikipedia.org/wiki/Expatriate

http://en.wikipedia.org/wiki/The_Economist

http://en.wikipedia.org/wiki/WTO

http://en.wikipedia.org/wiki/Garment_industry

http://en.wikipedia.org/wiki/Developing_nation

http://en.wikipedia.org/wiki/Credit_rating

http://en.wikipedia.org/wiki/Standard_%26_Poor's

Bangladesh has seen expansion of its middle class (world's fifty-fourth largest, just below of Singapore & Vietnam), and its consumer industry has also grown. In December 2005, four years after its report on the emerging "BRIC" economies (Brazil, Russia, India, and China), Goldman Sachs named Bangladesh one of the "Next Eleven", along with Egypt, Indonesia, Vietnam and seven other countries.

Bangladesh has seen a dramatic increase in foreign direct investment. A number of multinational corporations and local big business houses such as Beximco, Square, Akij, Ispahani, Navana Group, Transcom Group, Habib Group, KDS Group, T.K Group Of Industries, Dragon Group and multinationals such as Unocal Corporation and Chevron, have made major investments, with the natural gas sector being a priority. Now, the overall economic situation is shown below by presenting with graphs and numbers.

Graph 32..1: GDP Growth Rate

GDP growth rate for Bangladesh is not so high. On average it is in increasing trend. In 2001 it was 5.6% and in 2010 it ended with 6%. Between 2001 and 2010 there is a lots of ups and downs in the GDP growth rate but none of these is extremely high or extremely low. In 2002 it felt down to 4.4% but in 2005 it increased to 2003 again decreased to 4.90 and then increased several two years. Again in 2008 it came down to 4.90 then there is an increasing trend up to 2010.

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http://en.wikipedia.org/wiki/Chevron_Corporation

http://en.wikipedia.org/wiki/Unocal_Corporation

http://en.wikipedia.org/wiki/Dragon_Group

http://en.wikipedia.org/wiki/KDS_Group

http://en.wikipedia.org/wiki/Habib_Group

http://en.wikipedia.org/wiki/Transcom_Group

http://en.wikipedia.org/wiki/Navana_Group

http://en.wikipedia.org/wiki/M._M._Ispahani_Limited

http://en.wikipedia.org/wiki/Akij

http://en.wikipedia.org/wiki/SQUARE_(Bangladesh)

http://en.wikipedia.org/wiki/Beximco

http://en.wikipedia.org/wiki/Multinational_corporation

http://en.wikipedia.org/wiki/Foreign_direct_investment

http://en.wikipedia.org/wiki/Vietnam

http://en.wikipedia.org/wiki/Indonesia

http://en.wikipedia.org/wiki/Egypt

http://en.wikipedia.org/wiki/Next_Eleven

http://en.wikipedia.org/wiki/Goldman_Sachs

http://en.wikipedia.org/wiki/Brazil

http://en.wikipedia.org/wiki/BRIC

http://en.wikipedia.org/wiki/Consumer

http://en.wikipedia.org/wiki/List_of_largest_consumer_markets

http://en.wikipedia.org/wiki/Middle_class

Graph 3.2.2: GDP Per Capita

Although GDP growth rate have many ups and downs, per capita GDP has a pretty increasing trend. From 2001 to 2006 per capita GDP increased from US $1750 to US$2300. Then there is a sharp decline in per capita GDP to 1400. Again this per capita GDP grew to US$1700 in 2010 which is equivalent to 2002 level. If we compare this data with some other developing country like Bhutan, Maldives then we will found these are very low level of per capita GDP.

Graph 3.2.3: Inflation Rate

From 2001 to 2010 no government was successful in controlling inflation rate. From 2001 to 2003 the then government was somewhat able to control the inflation rate which is suggested by the data in the graph. Inflation rate was reduced 3.10% from 5.80%. But after that the rate started to skyrocket in the next several years. The rate was highest in 2008 which was 9.10%. The prices of necessary goods came out of the purchasing power of the middle and low class. Then in 2009 the rate decreased largely and increased again in 2010.

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Graph 3.2.4: Market Value of Publicly Traded Share

The recent share market debacle is the consequences of many factors; increase in the index with no fundamental changes of the company’s balance sheet is one of them. In 1998, after market debacle in 1997, the index was only 500. From 1998 to 2008 the index increased to 2800. But from 2008 to 2010 the index increased from 2800 to 8500. So, the fall was quite predictable. The market value data of publicly traded shares suggested that the value was US$3.61 billion 2006 but this value increased to US$6.671 billion in 2008 and US$7.068 billion in 2009.

Graph 3.2.5: Index Comparison

Until December, 2010 the market was in an upward trend. From 2008 to 2010 the DSE General index climbed up from 2800 points to 8500 points. Although in last 10 years (from 1998 to 2008) the index gains its value only 2300 points (in 1998 it was 500 and in 2008 it was 2800. So net gain is 2300 points.), but only in 2 years (from 2008 to 2010) the index gains value of 5700 points (8500-2800 = 5700). So at the end of 2010, market started to behave abnormally. The abnormality of the market accelerated at the beginning of 2011. In 10 th January, 2011 DSE General Index lost its value of 635 points and DSI index lost its value of 518 points within 5 minutes of

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trade. So, the transaction was forced to be closed. At the beginning of the next day when transaction started the market gains it value of 1012 points. This is not behavior of an efficient market. This inefficiency continued for the year. In January 2, 2011 DSE General Index and DSI index were 8304 points and 6888 points respectively. But 8th December, 2011 after a long turmoil in the market the index came down to the 4932 points for DSE General Index and 4113 points for DSI index. From the graph it is seen that both the index changed over the period in same way. When DSE General Index increases DSI Index also increases. When DSE General Index decreases DSI Index also decreases. So it can be concluded that there is a positive correlation between DSE General Index and DSI Index. This conclusion was also proved by calculating correlation coefficient between DSE General Index and DSI Index. It was found that the correlation between DSE General Index and DSI Index was perfectly positive (correlation coefficient r = 0.999529152).

Part: 4

Industry Analysis

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4.1 Overview of industry analysis

Industry analysis helps to assess the profit potential of each of the industries in which

the firm is competing. The main objective of the analysis is to decide in which

industries a firm should invest to earn highest profit taking minimum risk.

Graph 4.1: P/E Ratio

The graph sows the scenario of industry wise P/E ratios. The Banking sector has very low P/E ratio. The industry has a price earning multiple of 11.25. Other non-bank financial institutions have price earning multiple of 18.10. The insurance sector has very high price earning multiple which is 34. But none of this can be compared with paper and printing industry. This paper and printing industry has very high level of P/E ratio which is 148.50. This industry was extremely high P/E ratio. The price earning multiple for jute industry was negative because of negative average earning in

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the industry. IT sector was also taking the concentration of the investors. It has P/E ratio of 30.18.

Selection of industries

Considering industry P/E ratios and turnover the industries that I have selected are-

Banking industry,

Engineering industry,

Food & Allied,

Pharmaceuticals,

Financial institution

Porter’s Five Forces analysis

Now it is important to analyze the competitive strength of the selected industries. It

means to analyze how much strong or capable the industry is to retain profit. One

important tool is Porter’s 5 factor analysis which helps us to identify the relative

strength of industries. The five factors used by Porter are showed in the table below:

Threat of New Entrants-

Rivalry among Existing Firm-

Threat of Substitute Product-

Moderate

INDUSTRY

PROFITABILITY

Bargaining Power of Suppliers

Bargaining Power of Buyers-

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The five forces that should be analyzed to determine the relative bargaining power of

the firms in the industry and their customer and suppliers, which establish the profit

potential, are —

Pharmaceuticals Industry

Rivalry among existing firms

The average level of profitability is primarily influenced by the nature of rivalry

among existing firms in the industry. Factors determining this force are —Industry

Growth Rate, Concentration and balance of competitors, Differentiation. From the

above factor analysis it is apparent that the rivalry among existing firms of the

pharmaceutical industry is high.

Threat of new entrants

The ease with which new firms can enter in an industry is a key determinant of the

profitability of firms. For high economies of scale, capital requirement, legal barrier,

costly and difficult access to distribution channel and government price regulation it is

perceptible that threat of new entrants in pharmaceutical industry is low.

Threat of substitute products

Pharmaceutical industries in Bangladesh produce Allopathic drugs. So, substitute

products are Homeopathic, Ayurvedic, Unani, and Herbal medicines.it is evident that

pharmaceutical industry has very little threat from substitute products for the low

profitability and price-performance relationship of surrogates.

Bargaining power of buyers

The large number and low volume of purchase of buyers, buyers’ minute knowledge,

inability to backward integrate and little price sensitivity depict buyers’ low

bargaining power.

Bargaining power of suppliers

So, unavailability of alternative drugs, possibility of forward integration, buyers’

small % to suppliers’ business all lead to higher suppliers bargaining power.

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Financing Industry

The porter’s five factor analysis of banking industry shows the following picture-

Threats of substitutes is moderate, since there are some products and services

which are also offered by the bank

Threats of new entrants low. The existing firms enjoy some level of

economies of scale which makes the entry to be very costly,

a) High legal barriers Low Riskb) High initial capital requirement Low Riskc) High initial formalities Low Risk

Bargaining power of Suppliers is moderate, since there are many companies

providing the same service. There is no scope for customers to backward

integrate and at the same time there is no scope for suppliers to forward

integrate,

Bargaining power of Buyer is Moderate. Because the customer switching cost

is low

Rivalry among existing firms is high. There are numerous players in the

industry providing more or less standardized products.

a) Industry growth rate high Low Riskb) Around 30 competitors High Riskc) Switching cost is low High Riskd) Product differentiation low High Risk

Banking Industry

The porter’s five factor analysis of banking industry shows the following picture-

Threats of substitutes is high, since the products and services are commodity

type and there is very low switching costs for customers,

Threats of new entrants medium, since the industry is matured there is not

enough scope for new entrants to gain market share. Also the existing firms

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enjoy some level of economies of scale which makes the entry to be very

costly,

Bargaining power of Suppliers is moderate, since there are many companies

providing the same service. There is no scope for customers to backward

integrate and at the same time there is no scope for suppliers to forward

integrate,

Bargaining power of Buyer is low. Even if the segment of buyers is very large,

they can not exercise ultimate power in case the firms are providing

standardized products. Though rivalry would be high amongst the companies,

buyers are still face a hindrance when the existing companies agree on loan

and deposit terms,

Rivalry among existing firms is high. There are numerous players in the

industry providing more or less standardized products. So the situation calls

for ferocious price war to gain market share from each other to obtain profit

and thus high rivalry.

Food & Allied Products

Threat of substitutes is low. Each company in the industry has arrange of their

own different line of products which differ from other in terms of taste, flavor

and color,

Threats of new entrants medium. It is quite a growth industry keeping some

space for high profit if a company can come up with some different products,

Bargaining power of Suppliers is high. Each company providing different

products, having brand reputation, inability of the companies to backward

integrate makes this happen,

Bargaining power of Buyer is medium, the factors that contribute to it are-

inability of suppliers to forward integrate, non-standardized products, a bulk of

buyers, huge segment of market making suppliers dependent etc,

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Rivalry among existing firms is high. The companies in the industry

constantly strive for new addition to their product lines to meet emerging

customer demands and thus it increases price war.

ENGINEERING

Bargaining Power of Suppliers (Low)

• Suppliers’ product is not so much differentiated.

• Switching between suppliers is not costly.

• Suppliers do not have the option to forward integrate.

• Buying firm is an important customer for the supplier.

Bargaining Power of Buyer (Low)

Buyers’ do not buy in high volumes which means they are not

important buying unit.

The product of the company is not differentiated.

Buyers are not a threat to integrate backward into the business of

seller.

Buyers switching costs to competing brands are low.

Threat of Substitutes (Low)

Industry producing substitute is not profitable,

Substitute product is not improving in its price/ performance

relationship.

New entrants’ analysis (Moderate)

• There exists a sizable economics of scale in the industry.

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• Existence of strong learning/ experience curve effects in the industry

acts as an entry barrier.

• Large amount of capital is required in the industry to establish the

company.

• The industry is providing a standardized product which shows a low

switching cost also.

Threat of rivals in the Industry (High)

• The Industry is providing a standardized product.

• There is a large percentage of costs that are fixed.

• Industry demand is in a growing phenomenon.

• Buyers have low switching costs.

Part: 5

Company Analysis

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Financial performance analysis

5.1 Risk Return analysis

Five companies have been chosen for further analysis. These companies are IDLC,

Square, BATBC, AB Bank and BD Lamp. In this section Beta analysis, Standard

deviation (Risk) analysis, Mean return and Holding Period Return analysis are given

with their respective graphs. The entire data are taken as of the year of 2011. So for

this cross sectional analysis no time period is given on the graph.

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Graph 5.1.1: Comparison of Beta

Beta measures the systematic risk of a company. A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. From the above graph it is clear that AB Bank has the highest level of co-movement the market. Its beta coefficient is 0.94. So, it follows the market index and as equally risky as the market. The second highest co-movement occurs for IDLC. IDLC has beta coefficient of 0.93. The lowest level of return movement with the market occurs in case of Square. Square has beta coefficient 0.45. So, when the market goes up by 100%, the return of Square goes up by 45%. In case of downward market for this relationship the return of Square will go down by 45% if the market return goes down by 100%.

Graph 5.1.2: Comparison of Standard Deviation

Standard deviation measures the level of risk a security possesses. It shows how much variation or "dispersion" exists from the average (mean, or expected value). A low

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http://en.wikipedia.org/wiki/Mean

http://en.wikipedia.org/wiki/Statistical_dispersion

standard deviation indicates that the data points tend to be very close to the mean, whereas high standard deviation indicates that the data points are spread out over a large range of values. From the given graph it is found that none of the company has very much risky return. Their returns do no vary widely from the mean. If these five companies are compared within themselves then it can be concluded that IDLC has highest level of risk as it has standard deviation of 0.08. AB Bank and BD Lamp have the second highest level of risk as they both have standard deviation of 0.07. BATBC and Square have standard deviation of 0.05 and 0.04 respectively.

Graph 5.1.3: Comparison of Mean return

Mean is one form of central tendency. It is used to typify a list of values. As the data of a falling market (data of 2011) is taken so none of the company shows good percentage of return. Data of BATBC shows the highest percentage of return which is 0.91%. The second highest return produced by the security of Square. And then 0.25%, 0.15% and 0.14% return was produced by the security of IDLC, BD Lamp and AB Bank respectively.

Graph 5.1.4: Comparison of HPR

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http://en.wikipedia.org/wiki/Mean

Holding period return (HPR) is the total return on an asset or portfolio over the period during which it was held. It is the percentage by which the value of a portfolio (or asset) has grown for a particular period. In case of portfolio analysis, holding period return provides better result than mean return. In 2011, the share market of Bangladesh crashed. So the return of all the securities went down. Most of the security yielded negative return for the investors. This scenario is truly reflected by holding period return analysis of these five companies: IDLC, Square, BATBC, AB Bank and BD Lamp. BD Lamp yielded the most panic return which is around negative 939%. This means the investors of this company lost their investment at a very high rate. Then, Square yielded -407% returns and IDLC yielded -404% returns. Among all these five companies, only AB Bank yielded positive holding period return which is 96%.

Industry Company name

Banking AB Bank Ltd.

Engineering BD Lamps

Food & Allied BATBC

Pharmaceuticals Square Pharmaceuticals

Financing IDLC

5.2 Financial Indicators

According to the performance of different sectors There are selected five companies

from five sectors which are: Bank, pharmaceutical, engineering, food and financial

institution. To construct a portfolio an investor has to invest in securities of different

companies after thorough analysis of individual companies of different industries.

Thus an investor can diversify the risk and construct an optimal portfolio.

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http://en.wikipedia.org/wiki/Portfolio_(finance)

http://en.wikipedia.org/wiki/Asset

Companies are analyzed through the study of wide range of data, including P/E ratios,

EPS, NAV per share, net profit or loss after tax, reserve and surplus, market

categories and so on. According to these criteria of company analysis there are

selected the following companies which are shown in the following table.

British American Tobacco Bangladesh Company Limited

British American Tobacco Bangladesh Company Limited (BATB) is one of the

largest private sector enterprises in Bangladesh, incorporated under the Company’s

Act 1913 on 2nd February 1972 and the Company has a paid up capital of Tk. 600

million. It is a large player in the tobacco industry with a focus to the informed adult

smokers those have a strong Brand choice. It serves different market segment by

different brand of product. Other information regarding the company is presented

below:

Table-5.2.1

YearEarning per share

NAVNet Profit After Tax (mn)

Price Earning Ratio

% Dividend

% Dividend

Yield

2010 47.98 104.01 2878.59 14.93 430.00 6.00

2009 34.48 86.04 2068.57 11.87 300.00 7.33

Business Segment

Listing Year

No of Securities

Face Value

Market Lot

Food & Allied

197760000000 10.0 50

Share Percentage

Directorr /Sponsor Govt. Institute Foreign Public

65.91 0.64 21.48 0 11.97

27

2008 27.81 75.56 1668.78 7.25 240.00 11.90

2007 13.32 54.75 798.97 11.15 70.00 4.71

2006 6.03 42.40 361.58 13.95 30.00 3.57

2005 3.88 39.38 232.88 18.14 30.00 4.26

2004 11.22 38.70 673.31 8.33 100.00 10.70

2003 14.52 38.48 871.31 10.43 100.00 6.61

2002 16.52 39.09 991.19 8.08 110.00 6.61

2001 14.57 33.57 874.32 6.41 120.00 7.16

2000 5.92 40.87 476.59 9.15 90.00 12.38

Table-5.2.2

IDLC

IDLC Finance Limited is a multiproduct financial institution, established in 1985 with

the collaboration of reputed international development agencies. The primary goal of

IDLC was to help modernize the financial services industry, by introducing modern

modes of financing hitherto unknown to Bangladesh. This, we set about to do, by

pioneering the launch of a multitude of financial products and services. Become the

best performing and most innovative financial solutions provider in the country.

Create maximum possible value for all our stakeholders by adhering to the highest

ethical standard. Long term maximization of stakeholders' values in a socially

responsible manner is the main goal. The Paid up capital is 990 million taka

Business Segment

Listing Year

No of Securities

Face Value

Market Lot

Financial Institution

199299000000 10.0 200

Share Percentage


35.99 0.00 50.69 0 13.32

28

Table-5.2.3


NAVNet Profit After Tax (mn)

Price Earning Ratio

% Dividend

% Dividend

Yield

2010 22.12 61.50 1320.17 34.67 35.0065 0.75

2009 273.96 797.70 821.88 27.13 11.00 0.27

2008 162.55 644.52 406.37 14.86 15.0020 0.66

2007 126.22 582.35 252.40 12.03 15.0025 0.90

2006 103.44 471.14 155.16 7.58 5.0033 0.64

2005 101.82 529.74 152.73 7.27 37.50 5.07

2004 89.32 465.42 133.97 8.85 35.00 4.43

2003 80.56 477.67 120.84 8.55 30.00 4.35

2002 79.08 316.,47 118.62 7.90 30.00 4.80

2001 60.03 281.39 90.04 11.19 30.00 4.47

2000 46.78 251.10 70.17 10.13 30.00 6.33

Table-5.2.4

Square Pharmaceuticals

The nature of business of Square Pharmaceuticals is “owning and operating a modern

Pharmaceuticals and sells drugs and medicine. The establishment year is 1991 and

listing year is 1995. The ownership structure of the company is sponsors (54.16%),

general public (39.14%) and foreigners (6.7%). The capital market information of this

company is listed below:

Industry name: Pharmaceuticals and Chemicals industry.

29

Market category: Face value: 10, Paid up capital: 2648 million taka


Net Asset Value Per Share

Net Profit After Tax (mn)

Price Earning Ratio

% Dividend

% Dividend

Yield

2010 165.48 857.52 2497.12 28.13 35.0030 0.98

2009 170.51 905.05 2058.38 23.44 40.0025 1.36

2008 1381.86 35.90 40.0035 0.97

2007 218.61 1280.08 1303.24 11.20 50.0050 2.04

2006 234.67 1288.65 1165.86 9.32 75.0020 3.43

2005 290.71 1304.07 1255.85 10.97 77.0015 2.42

2004 269.46 1295.04 970.04 16.45 70.0020 1.58

2003 254.96 1086.42 764.88 7.14 70.0020 3.85

2002 303.78 1107.90 759.45 4.09 75.0020 6.04

2001 229.47 1030.71 573.68 5.52 70.00 7.50

2000 167.26 871.24 418.25 8.33 65.00 4.67

Table-5.2.5

AB Bank LTD

AB Bank Limited, the first private sector bank was incorporated in Bangladesh on

31st December 1981 as Arab Bangladesh Bank Limited and started its operation with

effect from April 12, 1982.The capital market information of this bank is mentioned

below:

30

Table-5.2.6




Price Earning Ratio

% Dividend

% Dividend Yield

2010 12.45 44.14 3989.52 14.60 10.0015 0.63

2009 133.26 399.00 3417.19 11.04 20.0025 1.70

2008 103.18 301.49 2300.62 9.16 15.0015 1.82

2007 256.10 807.00 1903.49 10.00 200 -

2006 93.08 481.74 532.19 30.54 30 -

2005 31.26 303.76 162.45 17.61 10 -

2004 18.19 251.22 90.07 20.01 5 -

2003 3.63 234.25 17.12 106.11 5 -

2002 5.78 234.46 23.69 38.64 15 -

2001 64.22 261.09 263.284 4.67 25.00 8.33

2000 38.75 221.07 158.86 6.88 18.00 6.75

Table-5.2.7

Business Segment

Listing Year

No of Securities

Face Value

Market Lot

Bank 1983

368611390 10.0 50

Share Percentage


13.90 0.57 48.65 0.02 36.86

31

BD Lamps

Bangladesh Lamps is an Engineer based company. It’s paid up capital 72 Million. The

capital market information of this company is mentioned below:

Table-5.8




Price Earning Ratio

% Dividend

% Dividend Yield

2010 8.57 155,48 61.75 30.51 35.00 1.34

2009 81.17 424.27 58.51 22.78 35.00 1.89

2008 76.75 378.10 55.32 14.29 35.00 3.19

Business Segment

Listing Year

No of Securities

Face Value

Market Lot

Engineering

19817208160 10.0 50

Share Percentage


61.03 0.00 22.24 0.03 16.67

32

2007 49.07 331.36 35.37 15.35 30.00 3.99

2006 47.0 282.29 34.13 10.32 30.00 6.18

2005 48.46 264.76 34.93 11.02 27.50 5.15

2004 45.48 243.80 32.78 13.44 25.00 4.09

2003 29.77 225.82 21.46 27.90 20.00 2.41

2002 19.93 218.05 14.36 22.58 20.00 4.44

2001 21.16 231.15 15.25 18.27 20.00 5.17

2000 22.60 229.88 1.63 141.61 15.00 4.69

Table-5.2.8

Part: 6

33

Application Of Dynamic Asset Allocation

6.1 Static allocation

This part has been done in 2 parts- static allocation and dynamic allocation. In doing

the static asset allocation, 4 scenarios are considered namely-

100% Investment in Equity portfolio i.e. Risky Portfolio.

100% Investment in T – Bill i.e. Risk free portfolio.

50% - 50% investment in Equity and T – Bill (Constant weight)

Static 50% - 50% investment in Equity and T – Bill

34

The stocks have been selected from Dhaka Stock Exchange (DSE). Stocks are

selected from five different industries with the cyclical and counter-cyclical nature of

business for diversification. There are considered T- Bill as risk free asset and there

are also considered 91 days T- Bill rate.

Scenario 1

100% investment in equity portfolio (risky asset)

Assumptions:

Amount to be invested is 1000000 tk. Investment horizon is one year. Portfolios are equally weighted after every quarter. Numbers of shares to be invested are determined with closing price of

last quarter.

Name Amount to be Invested

IPDC 100000.00

ISLAMI BANK 100000.00

PADMALIFE 100000.00

BEXIMCO 100000.00

BATASHOE 100000.00

PADMAOIL 100000.00

AFTABAUTO 100000.00

RDFOOD 100000.00

GP 100000.00

MARICO 100000.00

35

High Low Closing

Q11959608.

971596710.7

91706270.

62

Q22499194.

601618010.8

62125469.

33

Q32566433.

122001291.4

62133776.

73

Q43054541.

812557905.6

32814417.

63

When 100% investment is in risky asset, then money is allocated among the stocks

equally. In first quarter the 200000 amount of money allocated to each company is

divided by the closing price of last quarter of 2010 to get the no. of shares. After

finding that, there are considered the high, low and closing prices for quarter 1. The

final number of shares is found by adjusting the stock dividend. The portfolio value is

found out by multiplying the no. of shares with the corresponding prices.

Thus the closing value at and of 1st quarter are 855980.08. It will be the amount

available for investment for second quarter and the procedure goes like this for rest 2

Quarter 1

quarters.

36

37

NameWeight

Amount to be Invested

Initial Price

No. of Shares High Low Closing

IPDC 0.10 100000 18.105524.8

6 22.10 17.25 22.00ISLAMI BANK 0.10 100000 43.80

2283.11 45.00 39.00 42.10

PADMALIFE 0.10 100000 66.001515.1

5 159.00 129.10 130.00

BEXIMCO 0.10 100000 64.501550.3

9 574.00 480.36 508.70

BATASHOE 0.10 100000524.0

0 190.84 329.50 325.10 327.23

PADMAOIL 0.10 100000188.4

0 530.79 198.80 168.00 170.10

AFTABAUTO 0.10 100000 85.801165.5

0 86.90 67.30 74.50

RDFOOD 0.10 100000 25.303952.5

7 31.30 17.90 18.30

GP 0.10 100000172.6

0 579.37 174.90 141.00 147.30

MARICO 0.10 100000378.0

0 264.55 412.80 339.90 399.60

CompanyHigh Value

Low Value

Closing Value

IPDC122099.4

595303.8

7121546.9

6ISLAMI BANK

102739.73

89041.10 96118.72

PADMALIFE 240909.0

9195606.

06196969.7

0

BEXIMCO 889922.4

8744744.

19788682.1

7

BATASHOE 62881.6862041.9

8 62448.47

PADMAOIL 105520.1

789171.9

7 90286.62AFTABAUTO

101282.05

78438.23 86829.84

RDFOOD123715.4

270750.9

9 72332.02

GP101332.5

681691.7

7 85341.83

MARICO 109206.3

589920.6

3105714.2

9

1959608.

971596710

.791706270.

62

Quarter 2

NameWeight


Initial Price

No. of Shares High Low Closing

IPDC 0.1017062

7 22.00 7755.78 22.30 13.21 16.50ISLAMI BANK 0.10

170627 42.10 4052.90 43.00 33.90 38.30

PADMALIFE 0.10

170627

130.00 1312.52

159.80

144.50 149.10

BEXIMCO 0.1017062

7508.7

0 335.42589.0

0480.3

0 597.90BATASHOE 0.10

170627

327.23 521.43

356.00

345.60 354.23

PADMAOIL 0.10

170627

170.10 1003.10

459.60

168.60 363.40

AFTABAUTO 0.10

170627 74.50 2290.30

133.10 75.30 106.10

RDFOOD 0.1017062

7 18.30 9323.88 25.50 18.30 19.90

GP 0.1017062

7147.3

0 1158.36238.0

0147.2

0 178.90

MARICO 0.10 17062 399.6 426.99 655.1 385.2 611.30

38

7 0 0 0

Valu

39

CompanyHigh Value

Low Value

Closing Value

IPDC172953.7

9102453.

79127970.

30ISLAMI BANK

174274.67

137393.29

155226.04

PADMALIFE

209740.03

189658.54

195696.11

BEXIMCO 197561.1

2161101.

19200546.

33BATASHOE

185628.56

180205.70

184705.63

PADMAOIL

461024.09

169122.41

364526.01

AFTABAUTO

304838.41

172459.30

243000.42

RDFOOD237759.0

2170627.

06185545.

27

GP275690.7

0170511.

23207231.

37

MARICO 279724.1

9164478.

34261021.

832499194.

601618010

.862125469

.33

Quarrtar 3

Name Weight


Initial Price

No. of Shares High Low

Closing

IPDC 0.1021254

7 16.5012881.

63 21.60 16.40 19.20ISLAMI BANK 0.10

212547 38.30

5549.53 39.00 34.80 36.10

PADMALIFE 0.10

212547

149.10

1425.53

195.00

142.00 161.40

BEXIMCO 0.1021254

7597.9

0 355.49846.0

0556.2

0 721.20BATASHOE 0.10

212547

354.23 600.03

264.50

262.10 263.45

PADMAOIL 0.10

212547

363.40 584.88

391.10

371.40 208.50

AFTABAUTO 0.10

212547

106.10

2003.27

127.10 96.50 98.40

RDFOOD 0.1021254

7 19.9010680.

75 26.10 19.80 21.40

GP 0.1021254

7178.9

01188.0

8221.3

0177.9

0 196.40

MARICO 0.10 21254 611.3 347.70 889.5 592.8 749.50

40

7 0 0 0

Value

High Value Low ValueClosing Value

IPDC 278243.26 211258.77 247327.34ISLAMI BANK 216431.60 193123.58 200337.97

PADMALIFE 277978.89 202425.65 230080.99

BEXIMCO 300743.78 197723.04 256378.74

BATASHOE 158706.67 157266.61 158076.64

PADMAOIL 228748.23 217226.01 121948.36

AFTABAUTO 254615.60 193315.54 197121.75

RDFOOD 278767.59 211478.86 228568.06

GP 262921.39 211358.86 233338.28

MARICO 309276.13 206114.55 260598.602566433.1

22001291.4

62133776.7

3

Scenario 2

100% investment in T-Bill (risky free asset)

100% risk free: T-Bill

Investment

Q 1 Q 2 Q 3 Q 4

10000001046700.00 1105315.20 1182687.26 1277893.59

In case of 100% risk free investment in T-Bill the portfolio value is being compounded in each quarter and thus increasing from quarter to quarter.

Scenario 3

50%-50% investment in equity & T-Bill

When 50% investment is in risky asset and 50% investment in risk free asset then

money is allocated among the stocks equally. In first quarter the 100000 amount of

money allocated to each company is divided by the closing price of last quarter of

2010 to get the no. of shares. After finding that, there are considered the high, low and

closing prices for quarter 1. The final number of shares is found by adjusting the stock

41

1st Quarter

Risky Asset

Name Weight Amount to be I nvestedInitial Price No. of Shares High Low Closing

BATBC 0.20 100000.00 716.50 139.57 668.80 649.00 667.70IDLC 0.20 100000.00 464.75 215.17 248.50 242.00 249.83BD Lamps 0.20 100000.00 261.35 382.63 249.90 240.00 242.70AB Bank 0.20 100000.00 158.05 632.71 100.30 98.90 99.18Square Pharma0.20 100000.00 352.20 283.93 329.50 325.10 441.76

High Value Low Value Closing ValueBATBC 93342.64 90579.20 93189.11IDLC 53469.61 52071.01 53755.78BD Lamps 95618.90 91830.88 92863.98AB Bank 63460.93 62575.13 62752.29Square Pharma 93554.80 92305.51 125428.88

399446.88 389361.73 427990.04

Risk Free Asset

I nitial Value 500000.00Ending Value 528000.00

Total Value 927446.88 917361.73 955990.04

2nd Quarter

Risky Asset

Name Weight Amount to be I nvestedI nitial Price No. of Shares High Low Closing

BATBC 0.20 85598.01 667.70 128.20 633.90 605.50 630.90I DLC 0.20 85598.01 249.83 342.63 206.78 204.05 204.90BD Lamps 0.20 85598.01 242.70 352.69 171.80 170.10 170.25AB Bank 0.20 85598.01 99.18 863.06 85.95 83.60 86.10Square Pharma0.20 85598.01 441.76 193.77 356.00 345.60 354.23

High Value Low Value Closing ValueBATBC 81264.91 77624.07 80880.31I DLC 70848.00 69912.63 70203.87BD Lamps 60592.24 59992.67 60045.57AB Bank 74179.76 72151.58 74309.22Square Pharma 68980.57 66965.41 68637.60

355865.48 346646.36 354076.58

Risk Free Asset

Beginning Value 528000.00Ending Value 564960.00

Total Value 920825.48 911606.36 919036.58

dividend. The portfolio value is found out by multiplying the no. of shares with the

corresponding prices. Thus the closing value at and of 1st quarter are 427990.04. It

will be the amount available for investment for second quarter and the procedure goes

like this for rest 2 quarter. The closing value a of 1st quarter’s risk free asset are

528000.00. It will be the amount available for investment for second quarter and the

procedure goes like this for rest quarters.

Table-6.1.6

42

3rd Quarter

Risky Asset




333409.45 325580.53 349324.63

Risk Free Asset


Total Value 943848.73 936019.81 959763.91

4th Quarter

Risky Asset




283150.12 268525.92 302866.48

Risk Free Asset


Total Value 893589.40 878965.20 913305.76

Table-6.1.7

Table-6.1.8

Table-6.1.9

43

1st Quarter

Risky Asset

Name Weight Amount to be Invested Initial Price No. of Shares High Low Closing

BATBC 0.20 100000.00 716.50 139.57 668.80 649.00 667.70IDLC 0.20 100000.00 464.75 215.17 248.50 242.00 249.83BD Lamps 0.20 100000.00 261.35 382.63 249.90 240.00 242.70AB Bank 0.20 100000.00 158.05 632.71 100.30 98.90 99.18Square Pharma 0.20 100000.00 352.20 283.93 329.50 325.10 441.76


399446.88 389361.73 427990.04

Risk Free Asset

Initial Value 500000.00Ending Value 523350.00

Total Value 922796.88 912711.73 951340.04

Scenario 4

Static 50%-50% Investment in Equity & T-Bill

Total Amount to be Invested 1,000,000.00 Amount in Risky Asset (Stock) 50% 500,000.00Amount in Risk Free Asset (T-Bill) 50% 500,000.00

Re-allocation Schedule Re-allocation Proportion Stock 50% T-Bill 50%

Before Re-allocation 1st Quarter 2nd Quarter3rd Quarter

4th Quarter

Stock 427990.04 393522.27 441903.58 399330.97 T-Bill 523350.00 502307.54 479268.95 497663.46 Total 951340.04 895829.81 921172.53 896994.43After Re-allocation Stock 475670.02 447914.91 460586.26 448497.22 T-Bill 475670.02 447914.91 460586.26 448497.22 Total 951340.04 895829.81 921172.53 896994.43

Table-6.1.10

44

2nd Quarter

Risky Asset




395510.47 385264.30 393522.27

Risk Free Asset


Total Value 897818.01 887571.84 895829.81

Table-6.1.11

45

3rd Quarter

Risky Asset




421770.52 411866.76 441903.58

Risk Free Asset


Total Value 901039.47 891135.71 921172.53

4th Quarter

Risky Asset




373334.84 354052.77 399330.97

Risk Free Asset


Total Value 870998.30 851716.23 896994.43

Table-6.1.12

Table-6.1.13

Table-6.1.14

6.2 Dynamic allocation

46

In this strategy, the manager replicates an option through continuously revising the

proportions of a portfolio consisting of the underlying asset (stock/bond) and the risk

less asset (bond/T-bill) to insure portfolio’s value. This strategy requires buying more

stock when the market is going up and selling off some stock as the market goes

down. The proportions allocated to the underlying risky asset & the risk less asset

change every period, so this strategy requires a significant amount of trading. The no.

of units of the underlying risky asset that must be held long at any given moment will

be given by the call option’s “Delta”. The amount of risk less asset to hold is

determined by subtracting the value of the units held in the underlying asset from the

total value of the insured portfolio.

Assumptions:

In this analysis there have to invest in securities considering the market scenario. It

was not possible to apply our theoretical knowledge in practical applications in rigid

and structured form .For simplicity I have taken some assumptions for analytical

purpose:

Total amount of investment at the initial period is Tk. 1000000 and the

distribution initially is 50%-50% of our total fund in equity and T-Bills

respectively.

The fund will be equally distributed among 5 securities.

There are considered T- Bill as risk free asset

Time period is considered as quarterly

Initial Investment

T-Bill TK. 500000

Investment in Stock Tk. 500000

Total Amount Tk 1000000

The amount of equity will be equally distributed among 5 securities.

Delta: Delta is the no. of shares that an investor will buy for each option shorted.

So here delta will determine how much to buy/sell in equity securities and T-Bill.

47

Delta = (Insured Value in High - Insured Value in Low)/ (100% in risky asset in

high - 100% in risky asset in low)

Time Period 0

100% Risky Asset 1,000,000.00 Insured Portfolio 1000000.00

Equity 500000.00 T-Bill 500000.00 Delta 0.50 New Portfolio Equity 500000.00 T-Bill 500000.00 Total 1000000.00

Table-6.2.1

1st Quarter

100% Risky Asset 855980.08 Insured Portfolio 951340.04

Equity 427990.04 T-Bill 523350.00 Delta -0.15 Sell Share 559298.13 Buy T-Bill 559298.13 New Portfolio Equity -131308.09 T-Bill 1082648.13 Total 951340.04

Table-6.2.2

So, here the table defines the picture for first period. The initial delta was .5 while it

has reduced to -.15 in quarter 1. So, this difference amount of shares is sold. With the

money provided by selling off the equity is used to buy T-Bill. The ultimate portfolio

48

is found out by subtracting sold amount of shares from initial shares and adding the

new amount of T-Bill to initial t-bill.

2nd Quarter


Equity -108631.31 T-Bill 1143276.43 Delta 0.23 Buy Share 272375.9204 Sell T-Bill 272375.9204 New Portfolio Equity 163744.6102 T-Bill 870900.506 Total 1034645.12

Table-6.2.3

The table defines the picture for second period. The delta has increased to .23 in

quarter 2. So, this difference amount of shares is bought. To buy the shares we

need money and this money is provided by selling off this amount of T-Bill. The

ultimate portfolio is found out by adding bought amount of shares to initial

shares and subtracting the sold amount of T-Bill from initial t-bill.

3rd Quarter


Equity 161547.05 T-Bill 931863.54 Delta 0.64 Buy Share 287610.07 New Portfolio Sell T-Bill 287610.07 Equity 449157.11 T-Bill 644253.47 Total 1093410.59

Table-6.2.4

So, here the table defines the picture for third period. . The delta has increased to .64

in quarter 3. So, this difference amount of shares is bought. To buy the shares we need

money and this money is provided by selling off this amount of T-Bill. The ultimate

49

portfolio is found out by adding bought amount of shares to initial shares and

subtracting the sold amount of T-Bill from initial t-bill.

4th Quarter


Equity 389421.83 T-Bill 696115.88 Delta 0.64

Closing Portfolio

Equity 389421.83 T-Bill 696115.88 Total 1085537.71

Table-6.2.5

CONCLUSION

Stock

163744.61

T-Bill

870900.506

Total

1034645.12

Stock

449157.11

T-Bill

644253.47

Total

1093410.59

Period 1

Period 2 Period 3

Period 4

50

Stock

-131308.09

T-Bill

1082648.13

Total

951340.04

95951340.04

Stock

389421.83

T-Bill

696115.88

Total

1085537.71

Stock

500000

T-Bill

500000

Total

1000000

Period 0

In each period when the equity value is increasing, the delta is increasing and

when the equity value is decreasing, the delta is decreasing. It indicates that

dynamic allocation strategy has quite successfully captured the stock price

movement,

Any violation of such behavior may be related to sudden change in market or

effect of multiplier,

An investor must look for every possible situation before engaging in dynamic

asset allocation.

BIBLIOGRAPHY

www.dsebd.org

www.bangladesh-bank.org

www.bll.com.bd

www.idlc.com

www.abbank.com.bd

www.batbangladesh.com

www.squarepharma.com.bd

51

http://www.squarepharma.com.bd/

http://www.batbangladesh.com/

http://www.abbank.com.bd/

http://www.idlc.com/

http://www.bll.com.bd/

http://www.dsebd.org/

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