MARKOWITZ PORTFOLIO THEORY ON DSE ENLISTED COMPANIES

Page | 1

SPRING 2014
FIN 435: INVESTMENT THEORY
TERM PROJECT
SECTION: 01
COURSE INSTRUCTOR:
MR. M. MORSHED
SENIOR LECTURER, SCHOOL OF BUSINESS
NORTH SOUTH UNIVERSITY

SU
BMITTED BY
ID#
NAME
ZAHIN SARWAR

111-0021-030

MD. SAJEDUL HAQUE

112-0359-030

FAYSOL MD. AL-KOVI

111-0393-030

SHEIKH FUAD AHMED

101-0078-030

MD. SIRAJUM MUNIR

091-0138-030

DATE

OF

SUBMISSION: APRIL 27, 2014.

Page | 2

LETTER OF TRANSMITTAL
April 27, 2014.
Mr. M. Morshed,
Senior Lecturer, School of Business
North South University
Bashundhara Residential Area, Dhaka-1100
Subject: Submission of Term Paper.
Dear Sir,
We have tried to prepare the project with due sincerity and we would like to thank you for giving
us the opportunity to have the chance to work on this. Despite some limitations we have tried our
best to address the major and in depth issues in making this project accurate and reliable.
If you have any further enquiry concerning any additional information we would be very pleased
to explain that.
Sincerely yours,
ZahinSarwar
Md. Sajedul Haque
Faysol Md. Al-Kovi
Sheikh Fuad Ahmed
Md. Sirajum Munir

Page | 3

ACKNOWLEDGEMENT
Preparing this report has been a great task for all of us. Since the beginning of our work we have
come through many confusions and dead-ends, but still, we managed at the end. First of all, we
would like to thank almighty Allah for giving us patience and strength in order to complete this
project successfully.
We would like to extend our gratitude to our faculty Mr. M. Morshed for his immense support.
We are grateful to him for guiding us and helping us to finish this project.
Finally, we would like to thank each other for the wonderful cooperation we had shared among
ourselves as group members. Our dedication and strong teamwork has resulted in the successful
completion of this project. We learned extensively on real world implementation of Markwoitz
Portfolio Theory. This project has helped us to gain some knowledge and has exposed some
interesting answers.

Group Members of this Project

April 27, 2014

Page | 4

OBJECTIVES
The objective of this report is to:

Recording the daily prices of Square Pharmaceuticals Ltd, Olympic Industry

Ltd, Heidelberg Cement Ltd, IDLC, Singer Bangladesh Ltd and DSE all shares
price index and calculating their daily returns based on closing price for the year
of 2003-2012.

Calculating the arithmetic mean return and standard deviation of these five
stocks and DSE all shares price index.

Calculating the correlation coefficient and covariance of theses five stocks with
each other and also with the market index.

Calculating the portfolio risk and return by using different combinations of the
five stocks and drawing an efficient frontier of the portfolios.

Calculating the beta of each stock and comparing the calculated beta with the
beta available on market data.

Calculating the required rate of return of each stock based on Capital Asset
Pricing Model (CAPM).

This evaluation will be very helpful for the potential investors to have vast knowledge about the
portfolios and it will help them to decide in which company they should invest. Investment
decisions are critical decisions and need thorough analysis. When making investments, investors
look for dividend paid by a company and the capital gain. That is why the objective of any
company is to maximize shareholders wealth. So throughout all the report, starting from
Page | 5

collecting of the data up to drawing the conclusion on the financial situation of these stocks gives
the knowledge and understanding of how it works in real finance world.

METHODOLOGY
Primary Data
No primary data was required to prepare this report because all of the relevant information was
available in secondary data sources.
Secondary Data
The report is prepared by using secondary data only and the sources of the data were Daily
Trading Information from 2003 to 2012, annual reports and relevant websites.
Key Information reflected in the overviews of the companies was obtained from the official
websites of the companies as well as the latest annual report of the companies.
Microsoft Excel 2007 spread sheet was used for calculation as well as creating diagrams.

Page | 6

LIMITATIONS
There were quite a few limitations while doing this project. Here are some of the general
limitations:
Access of information:
One of the biggest limitations was the absence of a standard format of information. Specifically,
some of the market data were missing. For example, 2004 market data were missing. Therefore,
we failed to calculate the market return for 2004.
Stock selection factors:
We selected the stocks solely based on the performance of the company. Even though past
performance is worthwhile to evaluate investments, but it will not guarantee the future. Therefore
beside the performance of the company, we need to focus on other the macro economic factors
related to our investment.
Fundamental Analysis:
We selected our companies after doing the fundamental analysis only. We have chosen our stocks
based on certain key ratios. However, if we could do the technical analysis as well as calculate
the intrinsic value of the company, it will be more appropriate for evaluating the value of stocks.
Our personal flaws:
As the report is huge and time were very short, there may be some mistakes in our calculation.
This may give rise to wrong understanding of actual performance of the portfolio.

Page | 7

EXECUTIVE SUMMARY
This report focuses on implementing Markowitz Portfolio Theory by using IDLC, Square,
Olympic, Heidelberg Cement and Singer BD stocks which are currently enlisted in Dhaka Stock
Exchange. This report begins with selection of 5 stocks as well as the reasons behind selecting
those stocks and followed by a brief overview of selected companies.
Arithmetic mean, geometric mean, and standard deviations of five stocks as well as the market
are determined based on past 10 years daily returns. The correlations and co variances among
five stocks are also determined next. Then 10 portfolios were chosen and each portfolio consists
of two stocks. Risk and returns of those ten portfolios were calculated using Markowitz Portfolio
theory and risk-return trade off for those 10 portfolios are shown. Then efficient frontier was
constructed by plotting the risk and returns of efficient portfolios.
Finally, we calculated betas of those five stocks and compared with the betas already available in
the market. Then we calculated the required rate of returns of five stocks by using Capital Asset
Pricing Model and concluded the report.

Page | 8

TABLE OF CONTENTS
Instructions

10

Overview of company

11

Fundamental analysis of the company

13

Theoretical background: Markowitz portfolio theory

16

Portfolio construction

17

Beta calculation

24

Required rate of return

25

Conclusion

26

Reference

27

Appendix

28

Page | 9

INTRODUCTION
The objective of stock selection criteria is to: (1) Maximize the total return on investment for the
targeted holding period. (2) Minimize the risk. & (3) Maintain an appropriate degree of portfolio
diversification. One of the simplest ways to diversify a portfolio is to buy a stock in each of the
sectors that are widely referred to as broad sectors within the stock market. These different
sectors stocks rise or fall at different times within stock market advances and declines. In order to
create our diversified portfolio, we have picked five different sectors stocks from the
Pharmaceuticals and Chemical industry, Food and Allied industry, Financial Institution, Cement
industry and Engineering industry. We have chosen these sectors stocks to create our portfolio
because these industries have been experiencing robust growth over the last few years. A local
industry support policy and effective regulatory framework are the key reasons of success of
these industries. The consumption has steadily been rising and it is expected that these
companies will enjoy a good growth of margin over the next couple of years. Moreover, these
industries are achieving self sufficiency and have been expanding locally and internationally.
Many investors choose stocks based solely on performance. Even though, past performance will
not guarantee the future, but it is still worthwhile to evaluate investments based on their ability to
deliver consistent returns with minimal risk. Before selecting the stocks, we have gone through
the fundamental analysis where we have calculated some key ratios of these companies.
According to the Lanka Bangla Securities analysis (2013), Food & allied sector was the best
performing sector in 2013 as it gave more than 90% return. Second highest major gaining sector
was Pharmaceuticals with a rise of almost 40%, Square Pharmaceuticals gained 57.9%.The
engineering sector rally was mostly dominated by the Olympic Industries with 124.5% gain in
the market capitalization. Among engineering sector stocks, Singer Bangladesh posted 42.3%
return. Since, the banking sector is incurring loss of capitalization; therefore we have chosen to
invest in financial institution sector instead of banking sector to minimize the risk. Moreover,
these companies have consistent net profit over the last few years and huge amount of paid-up
capital in the stock market. These companies have had steady dividends over the past couple of
years and it is expected that it will continue to do so in the future.

Page | 10

OVERVIEW OF COMPANY
IDLC Finance Limited
IDLC is one of the largest Non-Bank Financing Institute in Bangladesh. they offers a wide range
of products and solutions comprising loans, deposit and capital market products and services to
corporate, consumer and SME clients. IDLC also operates two wholly-owned subsidiaries in the
capital markets through IDLC Investments Limited (providing merchant banking services) and
IDLC Securities Limited (providing brokerage services). Currently IDLC has 26 branches. IDLC
is listed on both Dhaka and Chittagong stock exchanges. The Companys market capitalization
stood at Taka 10,119 million as on31 December 2013. IDLC was initially established in
Bangladesh in 1985 through the collaboration of International Finance Corporation (IFC) of the
World Bank, German Investment and Development Company (DEG), Kookmin Bank and
Korean Development Leasing Corporation of South Korea, the Aga Khan Fund for Economic
Development, the City Bank Limited, IPDC of Bangladesh Limited, and Sadharan Bima
Corporation. Initial foreign shareholding of 49% was gradually withdrawn and the last foreign
shareholding was bought out by local sponsors in 2009.
Square Pharmaceuticals Limited
Square Pharmaceuticals Limited is the largest pharmaceutical company in Bangladesh and it has
been continuously in the 1st position among all national and multinational companies since 1985.
It was established in 1958 and converted into a public limited company in 1991. The sales
turnover of SPL was more than Taka 11.46 Billion (US$ 163.71 million) with about 16.43%
market share (April 2009 March 2010) having a growth rate of about 16.72%.Square
Pharmaceuticals Limited has extended its range of services towards the global market. It
pioneered exports of medicines from Bangladesh in 1987 and has been exporting antibiotics and
other pharmaceutical products.
Olympic Industry Limited
Olympic Industries Limited is one of the longest running and most reputed manufacturing-based
companies in Bangladesh. Olympic Industries Limited has very diversified product line. It has
various consumer goods including biscuits, confectioneries, batteries, and ball pens as well as
Page | 11

Pharmaceuticals, Power, and Information Technology. Olympic Industries Limited is currently

the market leader in the biscuit market and second in position in the battery market in
Bangladesh. Olympic Industries Limited is a public listed company and is trading on the Dhaka
Stock Exchange and Chittagong Stock Exchange. Olympic Industries Limited also involved in
some CSR activity like Olympic scholarship program and Energy plus football tournament.
Heidelberg Cement Bangladesh Limited
Heidelberg Cement Bangladesh Limited is a member of Heidelberg cement group, Germany.
This company came into Bangladesh in 1998. They have two reputed brand in the cement market
Ruby Cement and Scan Cement. Initially they started with a floating terminal in Chittagong.
Then they gradually have their own manufacturing facility. Now they have more than one
manufacturing facility in Bangladesh. 39 percent of their total share is to the general public and
other institutions.
Singer Bangladesh Limited
Singer Bangladesh is one of the oldest companies in Bangladesh. It was listed in Dhaka stock
exchange in 1983. During that time only 20 percent of its share was offered in the market. Now
its share is also traded in Chittagong stock exchange. Singer Bangladesh has a very diversified
product line. Initially it started as a sewing machine producer. But now it has many different type
of product. Its diversified product line include color televisions, fans, washing machines, irons,
microwave ovens, rice cookers, audio products, air conditioners, motorcycles, instant power
supply, DVD players, room heaters, kitchen appliances, net book, laptop, desktop computers,
generators, blue ray DVD players, LCD/LED TV and 3D television.

Page | 12

FUNDAMENTAL ANALYSIS OF THE

COMPANIES
IDLC Finance Limited
Market Capital in BDT
Paid up Capital in BDT
Reserve & Surplus in BDT
Net Profit After Tax in
BDT
Basic EPS in BDT
Current P/E Ratio

10859.063 mn
2011.0 mn
3348.1 mn

Share Percentage

Sponsor- 63.82%

Institution- 14.54%

Public-21.64%

Year
2012
2011
2010
2009
2008

Net Asset Value Per

Share
37.93
40.21
61.5
797.7
644.52

Year End P/E

20.74
34.28
34.67
27.13
14.86

% Dividend
Yield
N/A
N/A
0.75
0.27
0.66

361.71 mn
2.25
12.67

Square Pharmaceuticals Ltd

Market Capital in BDT
Paid up Capital in BDT
Reserve & Surplus in BDT
Net Profit After Tax in BDT
Basic EPS in BDT
Current P/E Ratio

135875.592 mn
4820 mn
15514.8 mn
4104.82 mn
8.52
24.53

Share Percentage

Sponsor- 54.21%

Institution- 27.18%

Public-8.96%

Year

Net Asset Value Per Share

Year End P/E

% Dividend
Page | 13

2012
2011
2010
2009
2008

72.2
81.375
857.52
905.05
N/A

24.31
26.6
28.13
23.44
35.9

Yield
1.05
0.92
0.98
1.36
0.97

Olympic Industry Ltd

Market Capital in BDT
Paid up Capital in BDT
Reserve & Surplus in BDT
Net Profit After Tax in BDT
Basic EPS in BDT
Current P/E Ratio

Share Percentage

28762.520 mn
1175.0 mn
556.3 mn
615.36 mn
3.45
46.7

Sponsor- 31.49%

Year
2012
2011
2010
2009
2008

Institution- 30.31%

Net Asset Value Per

Share
14.91
14.23
15
183.15
177.38

Public-27.45%

Year End P/E

21.38
38.82
33.08
11.32
16.82

Foreign-10.75%

% Dividend
Yield
0.79
0.53
0.55
1.59
4.06

Heidelberg Cement Bangladesh Ltd.

Market Capital in BDT
Paid up Capital in BDT
Reserve & Surplus in
BDT
Net Profit After Tax in
BDT
Basic EPS in BDT

33625.286 mn
565 mn
5735.0 mn
1474.08 mn
26.09
Page | 14

Current P/E Ratio

23.48

Share Percentage

Sponsor- 60.66%

Year
2012
2011
2010
2009
2008

Net Asset Value Per

Share
111.49
93.13
84.18
703.05
585.46

Institution20.58%

Public-18.76%

Year End P/E

11.58
19.28
20.7
14.29
11.58

% Dividend
Yield
1.89
1.76
1.18
1.77
2.72

Singer Bangladesh Ltd.

Market Capital in BDT
Paid up Capital in BDT
Reserve & Surplus in BDT
Net Profit After Tax in BDT
Basic EPS in BDT
Current P/E Ratio

10882.028 mn
491.0 mn
2048.7 mn
343.87 mn
7.01
28.32

Share Percentage

Sponsor- 75%

Public-25%

Year
2012
2011
2010
2009
2008

Net Asset Value Per Share

64.67
55.99
139.96
481.68
278.81

Year End P/E

16.43
28.23
82.14
24.42
29.06

% Dividend
Yield
7.62
1.04
8.37
3.22
1.51

MARKET YIELD
Company

Last Price Dividend Yield

Payout Ratio

Declaration(C)

Page | 15

IDLC

52.7

0.949 %

12.019 %

5%

SINGERBD

219.9

4.548 %

128.370 %

100 %

Page | 16

SQURPHARMA

278.7

0.897 %

22.462 %

25 %

HEIDELBCEM

612.7

6.202 %

166.302 %

380 %

Page | 17

OLYMPIC

244.7

0.409 %

12.739 %

10 %

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

Markowitz theory, for a large portfolio investor has to calculate a large number of variances and
co-variances.

PORTFOLIO CONSTRUCTION
The following steps are taken to construct two stocks portfolio from the selected five stocks of
Dhaka Stock Exchange.
Calculating Daily Returns
We have calculated daily returns of each stock from the daily trading information from the year
2003 to 2012 (10 years).
Calculating Arithmetic Mean, Geometric Mean and Standard Deviation
Arithmetic mean is the average of all returns of a single stock and it is the expected next period
return of that particular stock. Geometric mean refers to the compounding growth rate of daily
return over the last 10 years of a particular stock. Standard Deviation refers to risk or fluctuation
of returns in last 10 years. Higher the value of standard deviation higher risk is associated with
the stock. We have calculated arithmetic mean, geometric mean and standard deviation of each
stock based on 10 years daily return. Microsoft Office Excel 2007 formulas were used for
calculation.
Stock &

Arithmetic

Geometric

Standard

Market
IDLC

Mean
0.0047%

Mean
-0.1271%

Deviation
4.0991%

Square

0.0264%

-0.0667%

3.1221%

Olympic

-0.1540%

-0.2728%

4.9012%
Page | 19

Heidelberg

-0.0555%

-0.1014%

3.2025%

Singer

0.0127%

-0.0903%

3.4966%

Market

0.0477%

0.0360%

1.5379%

Among the selected stocks Singer is expected to produce highest daily return and Olympic is
expected to produce lowest daily return. Olympic is also the most risky stock and Square
pharmaceuticals is the least risky stock among the chosen stocks.
Determining Correlation & Covariance
Correlation is the relationship (positive, negative or no relationship) in between two random
variables and covariance refers to the measure of how much two random variable will change
together.
We have calculated the correlations and co variances among the stocks based on 10 years daily
return. The correlation indicates the relationship of movement in between two random stocks and
covariance indicates the degree of change.

IDLC

Correlations Matrix
Square
Olympi

Heidelber

Singer

IDLC

1.0000

-0.0104

-0.0194

0.0323

0.0122

Square

-0.0104

1.0000

-0.0100

-0.0462

-0.0331

Olympic

-0.0194

-0.0100

1.0000

-0.0251

0.0318

Heidelberg

0.0323

-0.0462

-0.0251

1.0000

-0.0050

Singer

0.0122

-0.0331

0.0318

-0.0050

1.0000

IDLC

Table of Co variances
Square
Olympic

Heidelberg

Singer
Page | 20

IDLC

0.001680

-0.000013

-0.000039

0.000042

0.000018

Square

0.000975

-0.000015

-0.000046

0.000013
Olympic

0.000036
-0.000015

0.002402

-0.000039

0.000055

-0.000046

-0.000039

0.001026

0.000039
Heidelber

0.000042

g
Singer

0.000006
0.000018

-0.000036

0.000055

-0.000006

0.001223

By analyzing different correlations and co-variances among different stocks, we found that most
of the stocks have negative relationship with other stocks. So, our portfolio risks will be reduced
due to negative correlations and co-variances.
Determining Weight
We have constructed our set of portfolios by using two stocks in each portfolio. The weight of
each stock was determined by the percentage of its market weight to total market cap of two
stocks.

Portfolios
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
Portfolio 6
Portfolio 7

Stocks
IDLC
Square
IDLC
Olympic
IDLC
Heidelberg
Square
Olympic
Square
Heidelberg
Olympic
Heidelberg
Singer

Weights
7.24%
92.76%
27.64%
72.36%
23.95%
76.05%
73.50%
26.50%
71.21%
28.79%
45.18%
54.82%
51.71%
Page | 21

Portfolio 8
Portfolio 9
Portfolio 10

IDLC
Singer
Square
Singer
Olympic
Singer
Heidelberg

48.29%
7.72%
92.28%
29.03%
70.97%
25.21%
74.79%

Risk & Returns of Selected Stocks

The expected risk & return (daily basis) are shown in table below. Expected return is the
arithmetic mean of past 10 years daily return and risk is the standard deviation of the returns.

Stock
IDLC

Return
0.0047%

Risk
4.0991%

Square Pharma

0.0264%

3.1221%

Olympic

-0.1540%

4.9012%

Heidelberg

-0.0555%

3.2025%

Singer BD

0.0127%

3.4966%

Identifying Correlations & Co variances of the desired portfolios

The correlation and covariance in between the stocks of each portfolio is shown in the following
table.
Portfolio
IDLC & Olympic

Correlation
-0.0194

Covariance
-0.000039

Olympic & Singer

0.0318

0.000055

-0.0251

-0.000039

Olympic & Heidelberg

Page | 22

IDLC & Heidelberg

0.0323

0.000042

Heidelberg & Singer

-0.0050

-0.000006

Square & Olympic

-0.0100

-0.000015

Square & Heidelberg

-0.0462

-0.000046

IDLC & Singer

0.0122

0.000018

IDLC & Square

-0.0104

-0.000013

Square & Singer

-0.0331

-0.000036

Most of the portfolios stocks in the above table consist of negative correlation as well as
negative covariance. So, the portfolio risk is supposed to be reduced due to negative relationship
in between the movement of returns of the stocks.
Determining Risk & Return of the Portfolios
We have calculated the daily expected risk and returns of each portfolio by using Markowitz
Model. Markowitz formulas are used to calculate expected risk & return of each portfolio.

Portfolio
IDLC & Olympic

Return
-0.1101%

Risk
3.7020%

Olympic & Singer

-0.1056%

3.6544%

Olympic & Heidelberg

-0.1000%

2.7911%

IDLC & Heidelberg

-0.0411%

2.6553%

Heidelberg & Singer

-0.0383%

2.5481%

Square & Olympic

-0.0214%

2.6255%

Square & Heidelberg

0.0028%

2.3672%

IDLC & Singer

0.0089%

2.6973%

IDLC & Square

0.0248%

2.9080%
Page | 23

Square & Singer

0.0253%

3.0028%

Constructing Efficient Frontier

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

Risk Return Trade off of all Portfolios

0.0400%
0.0200%

Return (% )

0.0253%
0.0248%
0.0028%

0.0089%
0.0000%
2.2000% 2.4000% 2.6000% 2.8000% 3.0000% 3.2000% 3.4000% 3.6000% 3.8000%
-0.0200%
-0.0214%
-0.0383%
-0.0400%
-0.0411%
-0.0600%
-0.0800%
-0.1000%

-0.1056%
-0.1101%

-0.1000%

-0.1200%
Risk

The diagram above shows the risk and return trade off of all portfolios. However, there are only
four portfolios that belong to the efficient frontier.

Page | 24

Efficient Portfolios
Efficient Portfolios
Square & Heidelberg

IDLC & Singer

IDLC & Square

Square & Singer

Return
0.0028

Risk
2.3672

0.0089

2.6973

0.0248

2.9080

0.0253

3.0028

Efficient Frontier
We have constructed a scattered diagram by using risk of each efficient portfolio as horizontal
axis variable and return of each efficient portfolio. The diagram gives us the Efficient Frontier.
The diagram is created by Microsoft Excel 2007.

Efficient Frontier
0.0300%

0.0253%

0.0250%

0.0248%

0.0200%
Return (% )

0.0150%
0.0100%

0.0089%

0.0050%

0.0028%
0.0000%
2.3000% 2.4000% 2.5000% 2.6000% 2.7000% 2.8000% 2.9000% 3.0000% 3.1000%
Risk

Page | 25

Now we have an efficient frontier consisting of four portfolios. Only these four portfolios of ten
portfolios produce the optimal risk and return trade off and other portfolios produce lower
returns at assumed risk.
An investor may choose any of those 4 portfolios according to his or her risk and return
preference. In other words, an investor will match their Indifference Curve with this Efficient
Frontier to make an investment decision.

Page | 26

BETA CALCULATION
We have calculated Beta () of each stock by regression analysis in Microsoft Excel 2007. In the
regression analysis we have considered Daily Market Returns of past 10 years as horizontal axis
variables and Daily Stock Returns of past 10 years as vertical axis variables. To compare our
betas with betas calculated by experts, we have taken betas from www.stockbangladesh.com
website.
Stocks

Beta calculated by
us

Beta calculated by
experts

IDLC

-0.01449923

1.04009418

Square

-0.01015178

0.61093204

Olympic

0.04118967

1.16839486

Heidelberg

0.01927099

0.88888641

Singer

0.07260845

0.96598688

Reason for different Betas for same stock:

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

Page | 27

REQUIRED RATE OF RETURN

We have used Capital Asset Pricing Model to calculate the required rate of return of the investors
for the five stocks. We are assuming 3% or risk free rate of return and 7% of market return.
Stock

Marke Risk

Beta

Beta

Required

Required Rate

Free

calculated

calculated

Rate of return of return based

Retur

Retur

by us

by experts

based on our

on experts beta

IDLC

7%

3%

-0.0145

beta
1.040094178
2.9420%

Square

7%

3%

-0.0102

0.610932042

2.9594%

5.4437%

Olympic

7%

3%

0.0412

1.16839486

3.1648%

7.6736%

Heidelber

7%

3%

-0.0193

0.888886414

2.9229%

6.5555%

7%

3%

0.072608

0.965986879

3.2904%

6.8639%

7.1604%

g
Singer

Required rate of return of each stock is subject to that particular stocks beta. Higher beta
produce higher required rate of return because the stock consists of higher systematic risk. In our
chosen stocks, Olympic has the highest rate of return and Square pharmaceutical has the lowest
rate of return. Difference in beta is the reason for different required rate of return.

Page | 28

CONCLUSION
The portfolios were constructed with proper diversification but, most of the portfolios failed
serve as efficient portfolios for investors. Constructing portfolios according to Markowitz model
has helped to reduce the risk of a portfolio but it also reduced the returns of some portfolios.
Hence, most of the portfolios are inefficient for the investors. However, investors can satisfy
their investment objective by investing in four efficient portfolios that provide optimal riskreturn combination.
Due to economic slowdown systematic has risen significantly and returns of most of the stocks
are affected with fluctuation of the market. However, Markowitz Model does not consider the
systematic risk. Capital Asset Pricing Model can be very useful to design portfolios because the
model considers the systematic risk associated with the stocks returns.

Page | 29

REFERENCE
Dhaka Stock Exchange. (n.d.). Retrieved April 24, 2014, from Dhaka Stock Exchange:
http://www.dsebd.org/
Heidelberg Cement Industries. (n.d.). Retrieved April 17, 2014, from Heidelberg Cements:
www.heidelbergcementbd.com
IDLC Finance Limited. (n.d.). Retrieved April 15, 2014, from IDLC: http://idlc.com/
Olympic Industtries. (n.d.). Retrieved April 14, 2014, from
www.olympicbd.com/index.php/about-company
Sectoral beta. (n.d.). Retrieved April 25, 2014, from Stockbangladesh.com:
http://www.stockbangladesh.com/resources/sector_beta/
Singer Bangladesh Limited. (n.d.). Retrieved April 16, 2014, from Singer: www.singerbd.com
Square Pharmaceutical Limited. (n.d.). Retrieved April 20, 2014, from Square Pharmaceutical
Limited: www.squarepharma.com.bd

Page | 30

APPENDIX

Page | 31

CALCULATION FORMULAS
We have calculated different values with the help of Microsoft Excel 2007 work sheet.
1. Daily Return:

Ending priceBeginning price

100
Beginning price

2. Arithmetic Mean (average return): =AVERAGE (returns)

3. Geometric Mean of returns: =(PRODUCT(1+retrurns)^(1/COUNT(Returns)))-1
4. Standard Deviation: =STDEV (returns)
5. Correlation x,y : =CORR(Returns of X, Returns of Y)
6. Covariancex,y: Correlationx,ySigmaxSigmay
7. Calculation of Beta: Regression Analysis in excel. Taking Market return at horizontal axis and
Stock Return at vertical axis.
8. Portfoliox,y Weights:
Weightx =

Market CAP X
Market CAP X+ Market CAP Y

Weighty =

Market CAP Y
Market CAP X+ Market CAP Y

9. Return of the Portfoliox,y = WxReturnx + WyReturny

Risk of the Portfoliox,y =

Weight( x )2 Risk ( x )2 +Weight ( y )2 Risk ( y )2+ 2 Weight( x ) Weight ( y)Covariance( x , y)

10. Required Rate of Return: Risk Free Return +(Market Return-Risk Return)

Page | 32

SECTOR INDEX

Page | 33

FUNDAMENTAL CHART
Page | 34

Page | 35

Page | 36

Page | 37

Page | 38

Page | 39

Page | 40

Page | 41

Page | 42

Page | 43