Part 1: Introduction

1.1 Introduction of the Study

For Bachelor of Business Administration (BBA), only theoretical knowledge is not enough for understanding the real life share market situation. It is a great opportunity for the student to know about the real life share market operations through making such a report on Security Analysis and Portfolio Selection which includes the analysis of different shares of different industries through its market price, EPS, P/E ratio, dividend payout ratio, NAV etc.

1.2 Background of the Study

Bachelor of business Administration (BBA) is a professional undergraduate program. The program is designed with an excellent combination of practical and theoretical aspects. During our study at the end of each course we have to prepare a report based on our knowledge about the course. As our course instructor assigned us we have prepared this report on Security Analysis and Portfolio Selection.

1.3 Significance of the Study

This report is an important partial requirement for Portfolio Management course. This is because knowledge and learning become perfect when it is associated with the theory and practice. That is student can understand and learn how to make a diversified portfolio and invest in the share market.

1.4 Scope of the Study

The report recovers the details of some companies share movement. The report emphasizes on the risk of the share market and how to invest in share market by making a diversified portfolio.

1.5 Objective of the Study

General Objective The main objective of this report is Security analysis and Portfolio Selection . Specific Objective With a view to fulfilling the broad objective some specific objectives have to be satisfied. The specific objectives of this study are as follows:

To determine the affect of price on portfolio formulation To investigate the optimum number of stocks that can minimize the portfolio risk. To find out the volume of different securities which affecting portfolio formulation 2

To find out relation of price earnings ratio with portfolio formulation To find out the affect of earning per share on portfolio formulation To find out the reasons behind portfolio formulation of different securities. To find out the impact of the economic condition during portfolio formulation.

1.6 Methodology
Methods followed to perform a job or conducting activities to complete a task is called methodology. In conducting this study the following methodology was adopted in collecting data and information, preparation of report etc. The methodology of this report is given below: Research Type: This is a descriptive research which briefly reveals the overall positions of company shares. Sources of Data: For preparing this report, we have used secondary sources of data. Secondary Data- The detail information for company shares are collected from secondary sources. The relevant information of company shares has been collected from Website of Dhaka Stock Exchange Website of Stock Bangladesh

Data Processing & Analysis: Data processing has been done manually after checking and editing. Required secondary data has been collected from internet. For analyzing, different types of computer softwares are used such as Microsoft Word, Microsoft Excel, Microsoft Power Point.

1.7 Limitations
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Although tried at the level best to make this report based on facts and complete information available, there are some limitations that are inevitable. These are as follow as: The main constraint of the study is inadequate access to information. Confidentiality of information was another barrier that hinders the study. Sufficient records, publications were not available as my requirements.

Part 2: Theoretical Aspects

2.1 Portfolio:

A portfolio is a group of securities held together as investment. By constructing a portfolio, investors attempt to spread risk in a number of securities rather than one security.

2.2 Portfolio Management:

An investor invests his funds in a portfolio expecting to get a good return consistent with the risk that he has to bear. Portfolio management is the act of managing and monitoring assets and investments. The goal of these investment decisions is to make the largest return on the original investment as possible. In other words, Portfolio management comprises all the processes involved in the creation and maintenance of an investment portfolio. It deals specifically with security analysis, portfolio analysis, portfolio selection, portfolio revision and portfolio evaluation.

2.3 Phases of Portfolio Management

Portfolio management is a process encompassing many activities aimed at optimizing the investment of ones funds. Five phases can be identified in this process: 1. Security analysis 2. Portfolio analysis 3. Portfolio selection 4. Portfolio revision and 5. Portfolio evaluation Each phase is an integral part of the whole process and the success of portfolio management depends upon the efficiency in carrying out each of these phases. Security Analysis: Security analysis is the initial phase of portfolio management process. The step consists of risk return characteristics of individual securities. A basic strategy in securities investment is to buy underpriced share and sell overpriced securities. But the problem is to identify underpriced and overpriced securities. This is what security analysis is all about. Approaches of Security Analysis: There are two alternative approaches to security analysis namely1. Fundamental Analysis 2. Technical Analysis Fundamental Analysis

An investor who would like to be rational and scientific in his investment activity has to evaluate a lot of information about the past performance and the expected future performance of companies, industries and the economy as a whole before taking the investment decision. Such evaluation or analysis is called fundamental analysis. Fundamental analysis is really a logical and systematic approach to estimating the future dividends and share price. It is based on the basic premise that share price determined by a number of fundamental factors relating to the economy, industry and company. Hence, the economy fundamental, industry fundamentals and company fundamentals have to e considered while analyzing a security for investment purpose. Fundamental analysis is in other words, a detailed analysis of the fundamental factors affecting the performance of companies. Each share is assumed to have an economic worth based on its present and future earning capacity. This is called its intrinsic value or fundamental value. The purpose of fundamental analysis is to evaluate the present and future earning capacity of a share based on the company, industry and company fundamentals and thereby assess the intrinsic value of the share. The investor can then compare the intrinsic value of the share with the prevailing market price to arrive at an investment decision. If the market price of the share is lower than its intrinsic value, the investor would decide to buy the share as it is underpriced. The price of such a share is expected to move up in future to match with its intrinsic value. On the contrary, when the market price of a share is higher than its intrinsic value, it is perceived to be overpriced. The market price of such a share is expected to come down in future and hence, the investor would decide to sell such a share. Fundamental analysis thus provides an analytical framework is known as economy-industry-company analysis. Technical Analysis Technical analysis refers to the analysis of securities and helps the finance professionals to forecast the price trends through past price trends and market data. Portfolio Analysis: Portfolio analysis phase of portfolio management consists of identifying the range of possible portfolios that can be constructed from a given set of securities and calculating their risk and return for further analysis.

Portfolio Selection

The goal of portfolio construction is to generate a portfolio that provides the highest returns at a given level of risk. A portfolio having this characteristic is known as an efficient portfolio. From the efficient portfolios, the optimal portfolio has to be selected for investment. Portfolio Revision Having constructed the optimal portfolio, the investor has to constantly monitor the portfolio to ensure that it continues to be optimal. The investor has to revise the portfolio in the light of the developments of the market. This revision leads to purchase of some new securities and sale of some of the existing securities from the portfolio. Portfolio Evaluation The objective of constructing a portfolio and revising it periodically is to earn maximum returns with minimum risk. Portfolio evaluation is the process which is concerned with assessing the performance of the portfolio over a selected period of time in terms of return and risk. Portfolio evaluation is useful in yet another way. It provides a mechanism for identifying weakness in the investment process and for improving these deficit areas. It provides a feedback mechanism for improving the entire portfolio management process.

2.4 Important Fundamental Factors of Security Analysis:

Earnings:

Earnings are important to investors because they give an indication of the companys expected dividends and its potential for growth and capital appreciation. That does not necessarily mean, however, that low or negative earnings always indicate a bad stock; for example, many young companies report negative earnings as they attempt to grow quickly enough to capture a new market, at which point theyll be even more profitable than they otherwise might have been. The key is to look at the data underlying a companys earnings on its financial statements and to use the following profitability ratios to determine whether or not the stock is a sound investment. Earnings Per Share:

In order to make earnings comparisons more useful across companies, fundamental analysts instead look at a companys earnings per share (EPS). EPS is calculated by taking a companys net earnings and dividing by the number of outstanding shares of stock the company has. For example, if a company reports $10 million in net earnings for the previous year and has 5 million shares of stock outstanding, then that company has an EPS of $2 per share. EPS can be calculated for the previous year (trailing 8

EPS), for the current year (current EPS), or for the coming year (forward EPS). Note that last years EPS would be actual, while current year and forward year EPS would be estimates. P/E Ratio:

EPS is a great way to compare earnings across companies, but it doesnt tell you anything about how the market values the stock. Thats why fundamental analysts use the price-to-earnings ratio, more commonly known as the P/E ratio, to figure out how much the market is willing to pay for a companys earnings. P/E ratio can be calculated by taking price per share and dividing by its EPS. For instance, if a stock is priced at $50 per share and it has an EPS of $5 per share, then it has a P/E ratio of 10. (Or equivalently, you could calculate the P/E ratio by dividing the companys total market cap by the companys total earnings; this would result in the same number.) P/E can be calculated for the previous year (trailing P/E), for the current year (current P/E), or for the coming year (forward P/E). The higher the P/E, the more the market is willing to pay for each dollar of annual earnings. Dividend Payout Ratio: the form of dividends. It is calculated by taking the companys annual dividends per share and dividing by its annual earnings per share (EPS). So, if a company pays out $1 per share annually in dividends and it has an EPS of $2 for the year, then that company has a dividend payout ratio of 50%; in other words, the company paid out 50% of its earnings in dividends.. The higher the payout ratio, the better it is. Book Value: liabilities. This is how much the company would have left over in assets if it went out of business immediately.

The dividend payout ratio shows what percentage of a companys earnings it is paying out to investors in

The book value of a company is the companys net worth, as measured by its total assets minus its total

2.5 Objectives of the Portfolio Management

The objective of the portfolio management is to invest securities in such a way that one maximizes ones returns and minimizes risks in order to achieve ones investment objective. A good portfolio should have multiple objectives and achieve a sound balance among them. Any one objective should not be given undue importance at the cost of others. Presented below are some important objectives of portfolio management.

 Safety of the investment : The most important objective of a portfolio, no matter who owns it, is

to ensure that the investment is absolutely safe. Other consideration like income, growths etc. only come into the picture after the safety of our investment is ensured. Investment safety or minimization of risks is one of the important objectives of portfolio management. There are many types of risks, which are associated with investment in equity stocks, including super stocks. Bear in mind that there is no such thing as a zero-risk investment. Moreover, relatively low risk investments give correspondingly lower returns. Investors can try and minimize the overall risk or bring it to an acceptable level by developing a balanced and efficient portfolio. A good portfolio of growth stocks satisfies all the objectives outlined above.
Stable current returns : Once investment safety is guaranteed, the portfolio should yield a

steady current income. The current returns should at least match the opportunity cost of the investor. Its referring current income by way of interest or dividend, not capital gains.
Appreciation in the value of capital : A good portfolio should appreciate in value in order to

protect the investor from any erosion in purchasing power due to inflation. In other words, a balanced portfolio must consist of certain investments that to appreciate in real value after adjusting for portfolio.
Marketability: A good portfolio consists of investments, which can be marketed without

difficulty. If there are too many unlisted or inactive shares in portfolio, investor will face problems in encasing them, and switching from one investment to another. It is desirable to invest in companies listed on major stock exchanges, which are actively traded.
Liquidity: The portfolio should ensure that are enough funds available at short notice to take care

of the investors liquidity requirements. It is desirable to keep a line of credit from a bank for use in case it becomes necessary to participate in right issues, or fore any other personal needs.
Tax planning: Since taxation is an important variable in total planning; a good portfolio should

enable its owner to enjoy a favorable tax shelter. The portfolio should be developed considering not only income tax, but also capital gains tax as well. What a good portfolio aims at is tax planning, not tax evasion or tax avoidance.

2.6 Important Considerations for Portfolio Management:

A portfolio comprises several individual securities. In the building up of the portfolio several transactions of purchase and sale of securities take place. It is important to understand that equity shares are not recommended for all investors. The stock markets are by nature volatile and unpredictable. The funds available with individual investors may not be large enough to create a well 10

diversified portfolio of securities. Moreover, the time, skill and other resources at the disposal of individual investors may not be sufficient to manage the portfolio professionally. To thrive for the investors some measurements are given below for formulating well diversified portfolio:

Should evaluate the portfolio performance time to time Should not speculate the shares Should not invest in high price shares Before investment should evaluate the company performance Should carefully invest in the new issues Should limit the number of scrips in the portfolio Should invest for the long term Investment may be done in the rising industries No one should purchase or sell a share on the basis of tips and rumors.

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Part 3: Security Analysis & Portfolio Selection

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