Академический Документы
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Prepared For
Dr. Md. Jahangir Alam Professor Course Instructor Portfolio Management
Prepared by
Mohammad Riyadul Islam (50) Tazrian Shainam Shahid (68) Muhammad Mazhar Hossain (96) Wahath Shahid (111)
Contents
Introduction .................................................................................................................................................. 3 1.1 Outline of the paper...................................................................................................................... 4
This term paper will consist of the following ............................................................................................ 4 1. 2. 3. 4. 5. Basic concepts and methods Portfolio design .................................................................................. 4 Developing an investment policy statement on the basis of the concepts above ........................... 4 Examining current and projected financial and economic conditions ............................................. 4 Implementing investment policy statement by constructing the portfolio ..................................... 4 Establish a process for a continuous monitoring of the investors needs ......................................... 4
Basic concepts and methods Portfolio design .......................................................................................... 4 2. Basic Portfolio Design steps .................................................................................................................. 5 2.2 Determining the goals of Investment ................................................................................................ 5 2.3 Asset Allocation................................................................................................................................... 5 2.4 Creating your Investment Policy Statement ....................................................................................... 6 2.4.1 Investment objectives .................................................................................................................. 6 2.4.4 Monitoring procedures .................................................................................................................... 6 3. The Investment Policy Statement ......................................................................................................... 7 3.1 Investor Circumstances ....................................................................................................................... 7 Objectives of the portfolio ............................................................................................................................ 7 Time Horizon ......................................................................................................................................... 7 Risk Tolerances...................................................................................................................................... 8 Roles and Responsibilities ............................................................................................................................. 8 Constraints of investors ................................................................................................................................ 8 Liquidity Needs.......................................................................................................................................... 8 Time Horizon ............................................................................................................................................. 9 Taxes ......................................................................................................................................................... 9 Unique Circumstances .............................................................................................................................. 9 Risk Tolerance ............................................................................................................................................... 9 Investment Opportunities............................................................................................................................. 9 4. Current Financial and Economic conditions ................................................................................... 10
4.1 Overview of the Market .................................................................................................................... 11 Risk associated with investment: ................................................................................................................ 11 4.2 Measures Taken ................................................................................................................................ 13 4.3 Examination of Market Anomalies.................................................................................................... 14 4.4 Future Directions of the Market ....................................................................................................... 14 We are investing BDT 1,000000 on Real Estate. Following are the justification behind the investment. ................................................................................................................................................................ 16 Calculation of Asset Appreciation from Real Estate Investment ............................................................ 16 Growth Rate Calculation ..................................................................................................................... 16 Conclusion: .................................................................................................................................................. 19 Reference .................................................................................................................................................... 20 Appendix ..................................................................................................................................................... 20
Introduction
This term paper will follow a systematic step by step process in order to design an investment portfolio that is based upon a certain financial circumstance. The resulting portfolio design will help to ensure that individual investment decisions are complimentary and supportive of the initial financial goals. The actual design of the investment portfolio is one of the most important aspects of investing. The individual investment decisions should be coordinated and organized according to a well-defined portfolio design. Just like investment professionals, personal investors need to develop a customized portfolio design to guide and coordinate their individual investment decisions. The key items they need to focus on in this process include their financial goals their ability to save their required average annual rate of return, and assuming the least amount of investment risk as possible With these items in focus we are asked to take the shoes of an investor with Tk. 20,00,000 that has to be invested in a suitable portfolio to achieve certain goals. Tk. 20,00,000 may seem like a significant sum of money but in investment terms its actually a small amount. As for most small investors, their investment portfolio will be a collage of individual and separate investment decisions. One investment decision is often made in isolation of previous decisions. More often than not the investment decisions are made at the time of their savings contribution and are based upon what seems to be working at that moment. This adhoc approach to investing can be counter-productive with previous investment decisions and can actually work against achieving the financial goals. Hence this term paper is going to look at a systematic approach to investing this sum. Creating a proper portfolio design will help the invesotors achieve the following investment goals:
Defending your savings from unknowable future events Incorporating your investing personality Complementing your financial circumstances Identifying your financial goals
The following section in this chapter discusses the outline of the report and the next chapter will review the basics of portfolio design in order to create a sound portfolio for the above mentioned investor.
Basic concepts and methods Portfolio design This section is going to highlight relevant literature and pertinent studies behind the effective design of portfolio which help rationalize the decisions in the next steps. Developing Investment policy statement Policy statement is the roadmap for the investors guide the investment process. Policy statement includes the objectives and policies of the investors and the constraint faced by the investors. It also sets the standards for evaluating the investment performance. Investors can evaluate the performance of the investment by comparing with the policy statement to find out whether the investment is appropriate for the investor. Examining financial and economic condition Before investing investors require to study short term and intermediate term expected financial and economic condition and forecast their future needs. There are 3 factors, investor needs, expectation from the financial market, and economic conditions, jointly determine the investment strategy for the investor. Implementing the Investment policy statement by constructing the portfolio With the policy statement and financial forecast the investor determine how to implement the investment plan to allocate available funds across different asset classes and securities. This involves constructing a portfolio to minimize the investors risk. Monitoring the performance of investment Investors needs might change overtime so it requires continual monitoring of the investors needs and conditions of the financial market. So it is very much important for the investors to monitor the portfolio performance and compare it with the expectation and the requirement of the investors. It does not meet the investors needs and requirement; investors require updating the investment portfolio. That means investors require to drop some securities and to add some other securities in the portfolio. So the policy statement should be modified accordingly when necessary.
Are the investments working together or against each other? Is the investor over exposed or under exposed to certain investment categories? Is the portfolio too risky or too conservative? Is the portfolio making or losing money?
There's more to successful portfolio building than picking good investments. Putting together a portfolio of securities is like building a wardrobe. Even if the closet is filled with top-of-the-line attire that may not be enough: All those components need to work together as outfits. Investment portfolios are the same way.
1. The number of years until your goal is reached. The deadline when you need the investment amount as well as the returns. That's the number of years to your goal. 2. How much money you need for your goal. 3. How much money you can invest right now. 4. How much money you can contribute each month.
To determine how well individual investments and overall portfolio are doing, investors must use the benchmarks chosen in the Investment Policy Statement. If it is found that the portfolio is not meeting the expected return, or that losses are falling outside of an acceptable range, the investor may need to adjust the investments. When monitoring, the focus must not only be on performance. It also has to be seen that the reasons these investments were chosen in the first place still apply. To do that, the status of each investment must be checked against the Investment Selection Criteria. If a stock or fund no longer meets the criteria, it may be a sell candidate.
Time Horizon
The investment guidelines are based upon an investment horizon of greater than five years. The strategic asset allocation is also based on this long-term perspective. Short-term liquidity requirements are anticipated to be small and to be covered by cash inflows.
Risk Tolerances
It is recognized that some risk must be assumed in order to achieve the investment objectives of In establishing the risk tolerances of the IPS, the ability to withstand short and intermediate term variability were considered.
We have ranked, among the broad possible priorities, the following investment objectives: Safety/ Capital Preservation (Adjusted for Inflation) Growth: Liquidity: Current Income: 4 5 5 3 3
The long-term objective for the assets under this policy is to achieve after fees and expenses, a pre-tax average annual return of 15% over the expected holding period of this portfolio.
Constraints of investors
Liquidity Needs
Sufficient liquidity must be maintained through the choice of investment vehicles and asset allocation, so as in cases of cash inflow deficit expenses can be met. Liquidity needs in the short term period inare minimal.
Time Horizon
This portfolio is suitable for investors with a minimum time horizon of five years. Capital values fluctuate over short period of time and the risk of incurring loss is high in short term period. Research suggests that this loss can be minimized over a long period of time. The portfolios asset allocation is based on this long-term perspective, since short-term liquidity needs are of less importance.
Taxes
Since the investment being made as a single investor, the returns from this portfolio will be subjected to income tax rates in-line with the policies set by the National Board of Revenue.
Unique Circumstances
Due to insufficient funds investing in some asset classes will not be conceivable.
Risk Tolerance
Some risks must be assumed in order to achieve the investment objectives. The portfolio's long time horizon, current financial condition and several other factors suggest collectively some interim fluctuations in market value and rates of return may be tolerated in order to achieve the longer-term objectives.
Investment Opportunities
For any investor these are many outlets through which they can invest their money. The following are the list of opportunities that are available in Bangladesh. Also we have identified the opportunities are most suitable to us based on our objectives:
Two other factors exacerbated the situation: Overpricing initial public offerings (IPOs), especially mutual funds, and the Securities and Exchange Commissions (SEC) decision to change rules erratically either as a panic response or to help a small group of people.
I.
Market risk: The risk to investors whose investment horizon is shorter than the maturity of a financial asset that the market price of that asset will decline, resulting in capital loss when sold. Sometimes referred to as interest rate risk. Reinvestment risk: The risk to investors whose investment horizon exceeds the maturity of financial asset that they will be forced to place earning from that maturity asset into a lower yielding investment because interest rate has fallen. Default risk: The probability that a borrower will fail to meet one or more promised principal or interest payments on a loan or security. Inflation risk: The risk that increases in the general price level will reduce the purchasing power of earnings from a loan, security or other investment. Currency risk: The risk that adverse movements in the price of one national currency against another currency will reduce the net rate of return from a foreign investment. Some time referred to as exchange rate risk. Political risk: The probability that changes in government laws or regulations will reduce an investors expected return from an investment.
II.
III.
IV.
V.
VI.
Risk associated with financial instrument we have selected for the portfolio We have selected following financial instrument for developing portfolio and their associated risk is discussed belowI. Purchasing of raw land: Risk associated with purchasing of raw land is uncertainty of prices and low liquidity. Certificate of deposit/Fixed deposit: It is the deposit of money for a specific length of time and it pays the higher interest rate than the saving account and penalty is imposed for early withdrawal of money from the account. Risk associated with this instrument is the liquidity risk because penalty is imposed for withdrawal of money before the maturity period. Common Stock: It is the perfect equity instrument. It represents residual ownership of a corporation. They get residual amounts after paying to creditors and preferred shareholders. Investors return depends on the performance of the company and the decision of the board of directors.
II.
III.
Common stockholders have some rights over the preferred shareholders. They have the right to vote at the shareholders meeting on fundamental policies of the corporation. Fundamental policy of the firm may be the wage policy or merger and acquisition policy, financial policy. They have the right to elect the member of the board of directors.
To evaluate the performance of the management of the firm. When dividends are declared by the board of directors they have the right to receive the dividend. They have the right to sell their shares in the secondary market without consent of the corporation. They are entitled to share assets in the event of the liquidation of the firm but they have the last claim on assets after creditors and the preferred shareholders. They have right to purchase proportionate amount of future stock offerings. These are called right shares. There is uncertainty for unexpected price change.
It is found that short-term measures are mostly related to direct injection of fund and facilitation of institutional funds in the secondary market. Most of those measures were implemented as per the timeline except for the establishment of two mutual funds (one is partially established). The medium and long-term measures, on the other hand, are related to strengthening the legal base of the market and taking measures against illegal activities. Although a number of these measures have been initiated (e.g. investor advisory service, corporate governance guideline, etc.), implementation of those and other measures would be difficult within the stipulated timeline (i.e. March 2012). In general, the government took a market-based approach to address the crisis which came under criticism on a number of accounts.
It has been argued in various studies and reports (CPD 2011a; CPD 2011b; Probe Committee for the Stock Market, 2011; Moazzem and Rahman 2012) that the crisis in the market is mainly originated in institutional failure, particularly of the regulatory body (SEC), which failed to monitor, operate and take actions against fraudulent and malpractices. Hence, stabilisation of the market and restoration of investors confidence through the initiated and other proposed steps are likely to be a far-fetched goal to achieve.
Portfolio investment has registered a 22 per cent rise in FY2012. Under the current state of market, it is hard to find reasons for stocks to be overpriced under rational expectation. In other words, ongoing measures should not have any significant contribution in any artificial rise of the market. Nevertheless market is still at a dysfunctional state. The General index at the end of September 2012 stands higher at 4544.41 compared to 4446.87 at the end of August 2012. The monthly turnover increased significantly from BDT 5727.66 crore in August 2012 to BDT 18761.51 crore in September 2012. Thus at this stage a careful selection of stocks of low risk companies and IPOs of stable well known companies are the way to go forwards for investors
10247933.88 18512396.69
Calculated growth rate = (50%*81%+30%*26%+20%*24%) = 45% Base value of the purchased land = 550,000 B.D.T Value of Land after 5 years = 550,000 x (1+45%) 5 = 3,218,437 BDT
Percentage increase from the base value = (3,218,437 - 550,000)/ 550,000 = 544%
We choose to purchase the land on 60 installments in 5-year time rather purchasing it directly with the amount of BDT 550000. Rest of the money will be kept in Mutual trust bank for 5 years which gives an interest rate of 12.5% on monthly schemes.
In this case, we have to pay BDT 700000 in total within the 5-year time period. The initial down payment (or the first installment) is 20% of the total amount which is (700000*20%) = 140000. Rest of the money (700000-140000) = 560000 BDT will be handed over in next 59 equal installments. Each installment is equal to (560000/59) = 9491.5 BDT per month, that is 113898 BDT per year. At the beginning, we have BDT 1,000000 to invest on Real Estate. Now after the initial down payment of BDT 140000, we are left with BDT 860000 which will be kept in Mutual Trust Bank that provides a 12.5% interest on monthly schemes. Money kept on Bank: BDT 860000
Year 1 BDT Installments to be paid for the real estate Interest from Bank on current amount Additional amount withdrawn from bank to pay the installment Net bank balance
Year 2 BDT
Year 3 BDT
Year 4 BDT
Year 5 BDT
113898
113898
113898
113898
113898
107500
106700
105800.4502
104788.2
103649.45
6398
7198 853602
8098 846404
9110 838306
Now, value of land after 5 years: 3,218,437 BDT Net Bank Balance after 5 years: 818947 BDT Total Return from investment on real estate: 4037384 BDT Percent increase on initial investment = 4037384/1000000 * 100% = 403.73%
Since the investment on real state can give an expected return of 403.73% , so we are investing half of our amount on real state. Its also a secured investment.
We are investing BDT 600000 on Real Estate. Following are the justification behind the investment.
These are DSE 20 companies with the highest expected rate of return. We choose 3 companies considering their beta and standard deviation. The 3 companies we choose are
AVERAGE ANNUAL RETURN S.D. C.V. Beta ACI 55.33% 105.97% 1.92 63.50 APEX Tannary 49.82% 49.59% 0.995307093 225.25 BATA 40.72% 37.53% 0.92173755 124.10 BAT 57.74% 48.06% 0.832302499 69.90 BD LAMP 31.91% 35.15% 1.101589784 485.25 BEX PHARMA 22.22% 48.08% 2.163636596 43.90 DHAKA BANK -18.18% 43.85% -2.411867334 370.25 GQ BALL PEN 32.10% 32.22% 1.00379314 53.20 IBBL -9.31% 48.96% -5.258359452 4,529.25 MEGHNA CEMENT 24.78% 67.87% 2.739164249 250.50 MONNO CERAMICS 32.56% 21.57% 0.662578093 175.50 NBL -19.00% 46.37% -2.440280738 739.00 PRIME -7.27% 56.87% -7.824468947 386.00 SINGER BD 48.34% 73.00% 1.51011549 742.25 SOUTHEAST BANK -0.78% 35.96% -45.84638843 353.75 SQUARE TEXTILE 17.45% 27.36% 1.56814379 64.10 SQUARE PHARMA 8.38% 28.63% 3.416340168 2,283.25 UTTARA BANK -21.38% 52.87% -2.472646187 1,813.00
0.206704122 33%
0.4
Bata Beta value: 124.10, St D: 37.53% BAT Beta value: 69.90, St D: 57.54% Monno Ceramic Beta value: 175.50, St D: 32.56%
We are investing BDT 400000 on Fixed deposit scheme of Mutual Trust Bank . Following are the justification behind the investment
Percent increase on initial investment = 720812.98/400000* 100% = 180.2% Since the investment on Fixed deposit can give an expected return of 180.2% , so we are investing 400000 amount on Fixed Deposit Scheme. Its also a secured investment. Liquidation of money is also a consideration for this investment.
Conclusion:
So overall we can say that if we can invest according to the portfolio this will give us the best expected returns possible considering the fact that we avoid all the unexpected situation. Portfolio has been done to minimize the risk and to gain the maximum advantage from the given money.
Reference
http://www.newdhakacity.com.bd/offers.php http://www.mutualtrustbank.com/info_interest_rate.php http://www.dsebd.org/dse20_share.php
Appendix