A Report on Portfolio construction using

Markowitz Model

Submitted By:
Submitted To:
Anurag Aman(15PGPM13) Dr.
Pinku Paul
Surendra Khangwal(15PGPM15)
 ACKNOWLEDGEMENT
It has been a great honor to become a student of you in this course. After being taught with
theoretical matters with real life exposure we are assigned an exciting report on Evaluation of
Portfolio Performance based on previously created portfolio. This report was assigned to us
as per as a part of requirement of our PGPM Course. I am gratefully informing you that we
have done it great favor. Now the report is ready for your kind consideration.
In completing the paper there are several occasions where I encountered some serious
problem and with your blessing as teaching aids, most of the cases we get away from them.
Even after that there may be some cases where we may make any intentional or unintentional
mistakes.
I expect your kind favor in accepting my work and hopefully that in future your adopt
technique of teaching will nurture our knowledge for great effect and oblige thereby.

Anurag Aman
Surendra Khangwal
Table of Contents
Executive Summary ................................................................................................................. 5
Introduction ................................................................................................................................
Origin of the Report ............................................................................................................... 6
Objectives of the report .......................................................................................................... 6
Methodology .......................................................................................................................... 7
Limitations ............................................................................................................................. 7
Economy, Industry & Company Analysis ................................................................................ 8
Economy Analysis.................................................................................................................. 8
Industry Analysis.................................................................................................................... 9
Company Analysis and selection ......................................................................................... 10
Portfolio Construction ............................................................................................................ 12
Step 1 Gathering Average Return Data ............................................................................. 12
Step 2 Variance - Covariance Matrix ................................................................................ 14
Step -03: Portfolio construction ........................................................................................... 16
Performance Evaluation of the portfolio ................................................................................ 20
Measurement Scales of portfolio.......................................................................................... 20
Performance Evaluation ........................................................................................................ 23
Comparison among those ratio ............................................................................................. 25
Information and sotino ratio ................................................................................................. 26
Findings and Conclusion........................................................................................................ 29
References .............................................................................................................................. 30
Executive Summary
This report is mainly based on the portfolio construction and for that I have selected 45
companies; in selecting companies both qualitative and quantitative approaches are used. My
selected 45 companies are from nine different assets class and do pose a great opportunity for
diversification.
In this report I have focused on the portfolio creation. At first I have discussed the portfolio
and portfolio creation process. Then I have described the different steps of portfolio creation
process. Then I applied different techniques to find out the return, standard deviation,
covariance and correlation of the stocks. Then I have used the Solver to analyze the portfolio
for achieving the objective of the report.
Then on the basis of the constructed portfolio I have evaluate the overall performance of the
portfolio through the ratio analysis and try to find out whether constructed portfolio is
performing better then market or not.
Introduction
Portfolio is grouping of different types of financial assets. Its a process of asset allocation.
Asset allocation is an investment strategy that aims to balance risk and reward by
apportioning a portfolio's assets according to an individual's goals, risk tolerance and
investment horizon. To create an efficient portfolio the economy is analyzed to find out the
true condition and to predict the future. After that the industry analysis is done to select the
profitable industry. Last of all individual asset is selected with risk and return preferences. In
this report, this Top-down approach is followed to select 20 securities with which return and
risk is calculated in different situation. This portfolio includes only risky asset and investment
in equity securities of ten companies in nine industries as determined by the requirement of
the course Teacher. This report contains Spreadsheet analysis and solver program to find the
four objective of investor.

Origin of the Report

The report focuses on the portfolio creation and analysis. This report is prepared with the
essence of the course of Portfolio Theory and analysis (F-407) with the full supervision of
our course teacher. This report gives me an insight of portfolio creation and analysis.

Objectives of the report

In this report, I try to learn the things as follows:
Portfolio Optimization
Minimizing risk (S.D.) by not allowing short sell
Minimizing risk (S.D) by allowing short sell

Methodology
In preparing the project paper I have followed some specific methodologies. I have select 20
companies of different industries which have the lower correlation among themselves. I
found out return series by matrix multiplication of weighted average of individual return and
standard deviation of portfolio and mean return. Then by using solver programme four
different portfolios are constructed whose are con-current with four objectives.
After that, efficient frontiers are formed in connection with the different set of assets in four
different cases. Limitations
I have been constrained by the unavailability of dividend and other data in case of some
company. Moreover this report involves only technical analysis not any qualitative judgment
which actually was beyond the scope of this report.
Economy, Industry & Company Analysis
Economy Analysis
Bangladesh is going to encounter series of economic hurdles in near future. It has been the
subject of threats by many issues. Most important issues are Inflation, Unemployment, Power
and gas crisis, political instability, poor infrastructure, corruption and slow implementation of
economic reforms. Despite some strengths and opportunities, Bangladesh has lots of
weaknesses and threats that could seriously undermine nation's development process at any
time. Bangladesh's economy has been on an inherently unstable path that can only end in
tears. But remittance inflow will act as lifeblood for Bangladesh's economy and it will slow
down the total apocalyptic process indeed. However, considering the totality, Bangladesh
must have to face several critical challenges at once even before embarking on the track of
vision 2020! To achieve this plan, government gives emphasis on Power sector and
infrastructure sector. Truly, nightmare is just on! The project of Digital Bangladesh also
gives emphasis on power and IT sectors. Without a sound capital market development is not
possible. Governments various steps taken over the year to bring stability in stock market
and to attract foreign investment has caught the eye of many foreign investors. DSE has
become a center for investment for foreign investors due to government capital market
friendly policies.

Industry Analysis
From the above economic analysis we can say that some industries will not suffer from
current adverse situation due to high growth and high profit potential. In DSE, there are
around 250 listed securities under 19 different industries. Among these industries I have
identified 11 different industries to construct a diversified portfolio. These are:
Banks
Financial Institutions
FMCG
Fuel & power
Cement
Insurance
Pharmaceutical
ENGINEERING
Miscellaneous
All of these industries are doing very well in our economy and these have future profit
potentiality.
Financial sector is the most important sector of any economy. The banks are the most
consistent performer since many years. These are also in the growth stage, so they have very
high future profit potentiality. As the economy grows so do these industries. As the
infrastructure of the country is developing, engineering and cement industries is the major
contributor of this development. Fuel & power and the pharmaceutical industry are
oligopolistic in nature. These two industries have been making a lot of profit. The current
state of our power sector is very poor. So it has huge scope of growth.

Company Analysis and selection

I have chosen 20 companies from those 11 industries. I tried to diversify as much as possible.
I have used some criteria to select these companies. These are -
1. The company must be the Market leader of the industry or close competitor
2. The company must arrange AGM
3. The company categories
4. Companies P/E, ROA & ROE must be satisfactory

Portfolio Construction
To construct the portfolio following steps are followed.
Building the efficient frontier consists of 5 steps:
Gathering the average return data for the assets
Variance- Covariance Matrix
Construct the portfolio with the highest Sharpe ratio
finding the portfolio set with the lowest standard deviation

Step 1 Gathering Average Return Data

For that I first provide input or the raw data of my selected 20 companies. Input of those data
is given as picture below.
CALCULATION OF RETURN:
Each months return has three components.
Capital gain
Cash dividend and
Stock dividend or Bonus Share

Step 2 Variance - Covariance Matrix

Covariance is a measure of the degree to which two variables move together relative to their
individual mean values over time. A positive covariance means that the rates of return for two
investments tend to move in the same direction relative to their individual means during the
same period of time. In contrast, a negative covariance indicates that the rates of return for
two investments tend to move in different directions relative to their means during the
specified time intervals over time. The magnitude of the covariance depends on the variances
of the individual return series as well as on the relationship between the series.
Here I have used 45 securities and it is assumed that all securities have equal weight of 0.022.
For this weight my portfolio return is 20.39% and risk is 16%.The Theta is 0.77 & the risk
free rate is 8%.

Step -03: Portfolio construction

The portfolio constructed on the basis of the aforementioned securities was analyzed on the
basis of the performance of it in the last 5 financial years from January 2011 till September
2016. The securities were used for computation of the total return (capital gain and dividend
yield) provided, level of risk borne for this return (standard deviation) and the bilateral effect
of the securities presence in the portfolio (covariance) in this duration.
The portfolio is conducted with the Sharpe ratio format (excess return over risk free rate for
each unit of risk). The target is to maximize the ratio for the portfolio with the available level
of risk and return of each of the securities. From this ratio, the optimal weight, proportion of
investment in each of the securities, is computed. As per the 5 years performance on these
securities, the following data was found:
Portfolio Performance and optimal combination:
Retur
company n
31.19
YES BANK %
32.50
UPL %
49.13
AJANTA PHARMA %
-
12.72
ASIAN PAINTS %
38.10
TVS MOTOR %
-
13.77
AXIS BANK %
43.50
BAJAJ FINSERV %
12.24
ADANI %
30.61
ZEE ENTERTAINMENT %
TORRENT 20.14
PHARMACEUTICALS %
BLUEDART 32.92
 %
46.74
BRITANNIA %
-
TECH MAHINDRA 6.37%
-
AUROBINDO PHARMA 5.57%
-
12.16
CADILA HEALTHCARE %
13.91
TCS %
18.62
SUNDARAM FINANCE %
37.05
BAYER CROPSCIENCE %
-
16.02
CRISIL %
13.73
DIVIS LABORATORIES %
22.67
AIA ENGINEERING %
-
12.76
TATA MOTORS %
21.22
DABUR %
32.95
PIDILITE INDUSTRIES %
21.13
BERGER PAINTS %
72.89
EICHER MOTORS %
49.49
SHREE CEMENT %
20.01
EMAMI %
34.19
INDUSIND BANK %
SHRIRAM CITY UNION 28.56
FINANCE %
DR REDDYS 12.58
LABORATORIES %
24.99
LUPIN %
15.19
MARICO %
49.34
PAGE INDUSTRIES %
10.32
SUN PHARMACEUTICALS %
GLAXOSMITHKLINE 21.69
CONSUMER HEALTHCARE %
GODREJ CONSUMER 29.30
PRODUCTS %

PFIZER 8.55%
MOTHERSON SUMI 10.35
SYSTEMS %
42.57
MRF %
MINDTREE 0.14%
GLENMARK 21.60
PHARMACEUTICALS %
HAVELLS INDIA 3.00%

HCL TECHNOLOGIES 8.78%

15.30
HDFC LTD %

The portfolio was constructed and was analyzed on basis of the 4 stipulated conditions. Each
of the conditions provided different behavior by the portfolio which was necessary for
interpretation. The interpretation of the scenario was provided by the efficient frontier
constructed for each of them. Each of the conditions is shown below along with the
appropriate graphical representations.
Condition 1: Short sales allowed

COMPANY WEIGHT
YES BANK -34.47%
UPL 57.55%
AJANTA PHARMA 11.75%
ASIAN PAINTS -1.27%
TVS MOTOR 5.08%
AXIS BANK -12.79%
BAJAJ FINSERV -8.85%
ADANI -54.72%
ZEE ENTERTAINMENT 57.39%
TORRENT
PHARMACEUTICALS 1.28%
BLUEDART 7.38%
BRITANNIA 26.04%
TECH MAHINDRA -47.24%
AUROBINDO PHARMA -8.43%
CADILA HEALTHCARE -1.61%
TCS -41.05%
SUNDARAM FINANCE -17.68%
BAYER CROPSCIENCE -10.68%
CRISIL -4.02%
DIVIS LABORATORIES -2.58%
AIA ENGINEERING 50.51%
TATA MOTORS 5.18%
DABUR -17.64%
PIDILITE INDUSTRIES 42.97%
BERGER PAINTS -4.20%
EICHER MOTORS 63.65%
SHREE CEMENT 44.13%
EMAMI -79.46%
INDUSIND BANK 28.35%
SHRIRAM CITY UNION
FINANCE 22.39%
DR REDDYS LABORATORIES -63.28%
LUPIN -35.90%
MARICO -7.66%

PAGE INDUSTRIES 56.25%

SUN PHARMACEUTICALS 20.14%
GLAXOSMITHKLINE
CONSUMER HEALTHCARE -12.02%
GODREJ CONSUMER
PRODUCTS 119.54%
PFIZER 5.60%
MOTHERSON SUMI
SYSTEMS -36.17%
MRF -44.51%
MINDTREE 11.52%
GLENMARK
PHARMACEUTICALS 5.60%
HAVELLS INDIA -8.39%
HCL TECHNOLOGIES 75.06%
HDFC LTD -62.70%

SUM 100.00%
EXPECTED RETURN 139.11%
STANDARD DEVIATION 22.58%

SHARP RATIO 5.80556

Condition 3: Short sells not allowed with riskless lending and borrowing allowed

COMPANY WEIGHT
YES BANK 0.00%
UPL 0.00%
AJANTA PHARMA 0.00%
ASIAN PAINTS 0.00%
TVS MOTOR 0.00%
AXIS BANK 0.00%
BAJAJ FINSERV 4.03%
ADANI 0.00%
ZEE ENTERTAINMENT 13.40%
TORRENT
PHARMACEUTICALS 0.00%
BLUEDART 0.00%
BRITANNIA 10.88%
TECH MAHINDRA 0.00%
AUROBINDO PHARMA 0.00%
CADILA HEALTHCARE 0.00%
TCS 4.48%
SUNDARAM FINANCE 0.00%
BAYER CROPSCIENCE 0.00%
CRISIL 0.00%
DIVIS LABORATORIES 0.00%
AIA ENGINEERING 0.00%
TATA MOTORS 0.00%
DABUR 7.25%
PIDILITE INDUSTRIES 0.00%
BERGER PAINTS 0.00%
EICHER MOTORS 27.34%
SHREE CEMENT 7.65%
EMAMI 0.00%
INDUSIND BANK 0.00%
SHRIRAM CITY UNION
FINANCE 0.00%
DR REDDYS LABORATORIES 0.00%
LUPIN 0.00%
MARICO 0.00%

PAGE INDUSTRIES 15.36%

SUN PHARMACEUTICALS 0.00%
GLAXOSMITHKLINE
CONSUMER HEALTHCARE 0.00%
GODREJ CONSUMER
PRODUCTS 8.58%
PFIZER 0.00%
MOTHERSON SUMI
SYSTEMS 0.00%
MRF 0.00%
MINDTREE 1.03%
GLENMARK
PHARMACEUTICALS 0.00%
HAVELLS INDIA 0.00%
HCL TECHNOLOGIES 0.00%
HDFC LTD 0.00%

SUM 100.00%
EXPECTED RETURN 46.91%
STANDARD DEVIATION 15.35%

SHARP RATIO 2.53548