Internship Report On

“Constructing an Optimal Portfolio and Efficient Frontier for the

Client at IDLC”

Submitted To:
Faculty of Business Administration
Eastern University, Dhaka

Submitted By:
Jakoan Kobir Riad
BBA Program
ID: 162200017
Major: Finance

Under the supervision of:

Mr. Md. Rizvy Ahmed
Assistant proctor and assistant professor
Faculty of Business Administration
Eastern University, Dhaka

Date of submission: 1st June, 2020

LETTER OF TRANSMITTAL

June 1st, 2020

Mr. Md. Rizvy Ahmed

Assistant Proctor and Assistant Professor

Faculty of Business Administration
Eastern University, Dhaka
Subject: A letter of transmittal for submission of the internship report

Dear Sir,
Here is the report that I was obliged to prepare as a part of my graduation from Faculty of
Business Administration (Finance), Eastern University. I have completed my internship program
in IDLC Finance Limited as a part of my study. I have tried myself to explain my learning and
experience I have gathered from my internship program briefly in this report. My report is on the
topic “Constructing an Optimal Portfolio and Efficient Frontier for the Client at IDLC”
and I have tried my level best to follow your provided guideline and instructions.

I would like to thank you for giving me the opportunity to write this report and for your support.
Rather, in case of any further clarification or elaboration as to my report, I would welcome the
opportunity to consult with you to explore how my findings could best meet your needs.

Sincerely Yours
Jakoan Kobir Riad
ID: 162200017
Major in finance (BBA)
Faculty of Business Administration
Eastern University, Dhaka

ii
DECLARATION

I declare that the Internship Report on “Constructing an Optimal Portfolio and Efficient
Frontier for the Client at IDLC”. Embodies the result of my own research works, pursued
under the supervision of Mr. Md. Rizvy Ahmed, Assistant proctor &Assistant Professor of the
Faculty of Business Administration, Eastern University.

I further affirm that the work reported in this report is original and no part or whole of this report
has been submitted to, in any form, any other university or Institution for any degree or any other
purpose.

Jakoan Kobir Riad

ID: 162200017
Major in finance (BBA)
Faculty of Business Administration
Eastern University, Dhaka

iii
SUPERVISOR’S CERTIFICATE

This is to certify that the “Constructing an Optimal Portfolio and Efficient Frontier for the
Client at IDLC” is the bona fide record at the report is done by Jakoan Kobir Riad, ID No:
162200017, as a partial fulfillment of the requirement of Bachelors of Business Administration
(BBA) degree from the Faculty Of Business Administration, Eastern University.

I wish his success in all his future endeavors.

____________________

Mr. Md. Rizvy Ahmed

Assistant proctor and assistant professor
Faculty of Business Administration
Eastern University, Dhaka

iv
ACKNOWLEDGEMENT

At first I would like to express my gratefulness to almighty Allah who has given me the
opportunity to go through the total process of internship and to write a report in this regard. I
would like to acknowledge my deepest gratitude to the honorable supervisor Mr.Md.Rizvy
Ahmed, Assistant proctor &Assistant Professor of the Faculty of Business Administration,
Eastern University, Dhaka, who has given me suggestions regarding the writing of the report and
to go through the process, which has become an excellent way of understanding the topic of my
internship.
I would like to express my deepest gratitude to Md. Maher Ullah, Manager of Credit
Administration-SME and Md Abdullah, Assistant Manager of Credit Administration-SME, Md
IDLC Finance Limited, Dilkusha Branch and also Khaled Hasan, IDLC Portfolio officer at IDLC
investment for sharing information with me and help me to gain knowledge about such a reputed
organization and also enables me to know how NBFI and portfolio investment work. My
sincerest thanks go to the all others who were involved and helped directly and indirectly in
preparing this report. Although I face some difficulties while preparing this report but I enjoyed
each and every moment of collecting information about IDLC Finance Limited.
Finally, I am grateful to the Faculty of Business Administration, Eastern University, for giving
me the opportunity to work outside for attaining practical knowledge. This report suffers from
shortcomings but I have tried my level best to bring about all the facts in comprehensive manner.
Thanks to all from core of my heart.

v
EXECUTIVE SUMMARY

IDLC Finance Limited is undoubtedly the number one financial institution in NBFI industry of
Bangladesh by having the best portfolio of the country. Besides financing many organization and
Business IDLC also provide services in the stock market. They have a separate division called
“IDLC Investment”. IDLC investment provide clients with the portfolio advisory service. I will
discuss further about it in my report.
My first objective in this report is to find out the perfect portfolio in the stocks investment for
the individual clients and find the right portfolio considering their risk aversion.
In case of three months internship, I used to work at administration for the first two months and
after that I got transferred in the Investment department. In the administration department I was
working in the clearing department where I used to work with postdated cheque and Un Dated
Cheque. In the investment department I was doing research for the creating optimal portfolio. I
tried to put the information I gathered from the Portfolio advisory sector at IDLC and create a
report on Creating optimal portfolio and efficient frontier.
However, it also gives a clear picture what I have learnt during three months long internship at
IDLC and how I was equally benefited for the organization and for myself. Lastly, with a
recommendation I tried to produce this report as informative as possible with numerous
information I have gathered.

vi
Contents
Letter of Transmittal........................................................................................................................ii
Declaration.....................................................................................................................................iii
Supervisor’s Certificate..................................................................................................................iv
Acknowledgement...........................................................................................................................v
Executive Summary........................................................................................................................vi
CHAPTER-1....................................................................................................................................1
INTRODUCTION...........................................................................................................................1
1.1 Background of the Study...................................................................................................2
1.2 Rationale of the Study...........................................................................................................2
1.3 Objectives of the study..........................................................................................................3
Broad Objective:....................................................................................................................3
Specific Objectives:................................................................................................................3
1.4 Scope of the Study.................................................................................................................3
1.5 Limitation of the Study..........................................................................................................3
1.6 Literature Review..................................................................................................................4
Chapter 2..........................................................................................................................................8
Methodology of the Study...............................................................................................................8
2.1 Research Design....................................................................................................................9
2.2 Time frame of Data Collection............................................................................................10
2.3 Type of Research.................................................................................................................10
2.4 Sources of Data....................................................................................................................10
2.4.1 Type of data & Time Frame of Data.........................................................................10
2.5 Criteria for Selecting Company...........................................................................................10
2.5.1 Company Overview....................................................................................................11
2.6 Analysis Tools.....................................................................................................................16
2.6.1 Creating optimal portfolio (Without Shor sale).......................................................17
2.6.2 Plotting the Efficient Frontier...................................................................................20
2.6.3 Creating CAL Line.....................................................................................................20
Chapter 3 RESULTS AND FINDINGS........................................................................................21
3.1 Annual expected return of the assets...................................................................................22
3.2 Equally weighted portfolio:.................................................................................................23

vii
3.3 Optimal portfolio:................................................................................................................24
3.3.1 Capital Allocation when investor is less risk averse................................................24
3.3.2 Capital Allocation when investor is more risk averse.............................................25
3.4 Efficient Frontier.................................................................................................................25
Chapter 4 FINDINGS AND RECOMMANDATIONS................................................................27
4.1 Recommendations................................................................................................................28
4.2 Conclusion...........................................................................................................................28
APPENDIX AND REFERENCE..................................................................................................29
Appendix:..................................................................................................................................30
Reference:..................................................................................................................................32

viii
CHAPTER-1

INTRODUCTION
1.1 Background of the Study

The internship program is an integral part of Bachelor of Business Administration (BBA).This

program creates a unique opportunity for the students to apply their theoretical knowledge into

practice and gain valuable real world business experience. During the program, students can also

realize existing business condition apart from having opportunities to solve the problem using

various analytical tools. It has become essential for every finance student to have some idea on

the NBFI and stock exchange. As our educational system predominantly text based, inclusion of

practical orientation program is an exception to the norm. From practical knowledge, we will be

able to know real life situations and start a career with some practical experience. After the

completion of BBA program I was placed in IDLC Finance & Investment for the internship

program under the guidance of my faculty supervisor. The duration of my organizational

attachment is 2 months, starting from 7th February 2020 to 7th April 2020. For successful

completion of BBA program; it requires submitting a report, which would illustrate a basic

reflection of the learning.

1.2 Rationale of the Study

IDLC Finance Limited, formerly known as Industrial Development Leasing Company of

Bangladesh Limited (IDLC),[3] is a multi-product Non-Banking Financial Institution with headquarters

in Dhaka, Bangladesh.[4] It offers financial services in the form of Small and Medium enterprise

(SME) finance products, Supplier and Distributor finance, Corporate finance, Structured finance,

retail finance, Deposits and Treasury products. Other than that it is unique for the other NBFI

because it has a division called “IDLC Investment” which provide the clients with the portfolio

supervisory & advisory services. Luckily I got to work in the both divisions. I find the portfolio

advisory service very interesting, that’s why I think creating an optimal portfolio for the client would

2
be very interesting to do my report. Thus I am doing this report on the topic “Creating optimal

portfolio and efficient frontier for the client at IDLC”.

1.3 Objectives of the study

Broad Objective:
 Create a satisfactory and profitable portfolio for the client.(without Short Sale)

Specific Objectives:
 Create an optimal portfolio using necessary tools.

 Capital allocation according to the risk aversion of the individual clients.

 Create a minimal variance portfolio and make efficient frontier.

1.4 Scope of the Study

The scope of this report is to understand the stock market and the riskiness and profitability of

various securities under a portfolio. Making an efficient portfolio that contains both risky and risk free

assets and also understand the impact of risk aversion on the capital allocation.

1.5 Limitation of the Study

Objective of the practical orientation program is to have practical exposure for the students. My

permanent status is for only two months, which is somehow not sufficient enough to gather

adequate experience of such vast banking business. After working whole day in the office it is

very much difficult to study again the theoretical aspects of banking. Finally, as the banks

renovation activities is going on so the physical working condition was not healthy enough that

we thought it would be. Other limitations-

 Eight weeks of time are not enough for the study.

 The staffs of the branch are some time so busy that they could not help us all time.

 Gathering adequate information is very difficult.

 Recent factors could not possible to enter in the study that may reflect the results.

3
1.6 Literature Review

Portfolio optimization is the process of selecting the best portfolio (asset distribution), out of the

set of all portfolios being considered, according to some objective. The objective typically

maximizes factors such as expected return, and minimizes costs like financial risk. Factors being

considered may range from tangible (such as assets, liabilities, earnings or other fundamentals)

to intangible (such as selective divestment).Modern portfolio theory was introduced in a 1952

essay by Harry Markowitz; see Markowitz model. It assumes that an investor wants to maximize

a portfolio's expected return contingent on any given amount of risk. For portfolios that meet this

criterion, known as efficient portfolios, achieving a higher expected return requires taking on

more risk, so investors are faced with a trade-off between risk and expected return. This risk-

expected return relationship of efficient portfolios is graphically represented by a curve known as

the efficient frontier. All efficient portfolios, each represented by a point on the efficient frontier,

are well-diversified. While ignoring higher moments can lead to significant over-investment in

risky securities, especially when volatility is high, the optimization of portfolios when return

distributions are non-Gaussian is mathematically challenging. Markowitz Portfolio (1952)

postulated that an investor could optimize return and inversely mitigate losses by proportioning

asset classes which in turn adapts the inherent risk of each asset. The principles of MPT assume

that all investors are willing to accept a certain level of risk for the highest possible return. Given

the choice, investors will likely choose the least amount of risk for the greatest level of return.

MPT implies that through diversification, an investor can optimize return and mitigate losses by

taking a calculated level of risk. MPT introduced commonplace terms like 80/20 portfolio (80%

stocks, 20% bonds), 60/40 portfolio (60% stocks, 40% bonds). The Efficient Frontier Markowitz'

work on an individual's investment behavior is important not only when looking at individual

4
investment, but also in the context of a portfolio. The risk of a portfolio takes into account each

investment's risk and return as well as the investment's correlation with the other investments in

the portfolio. A portfolio is considered efficient if it gives the investor a higher expected return

with the same or lower level of risk as compared to another investment. The efficient-market

hypothesis (EMH) is a theory in financial economics that states that asset prices fully reflect all

available information. A direct implication is that it is impossible to "beat the market"

consistently on a risk-adjusted basis since market prices should only react to new information or

changes in discount rates (the latter may be predictable or unpredictable). The EMH was

developed by Professor Fama who argued that stocks always trade at their fair value, making it

impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.

There are three variants of the hypothesis: "weak", "semi-strong", and "strong" form. The weak

form of the EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already

reflect all past publicly available information. The semi-strong form of the EMH claims both that

prices reflect all publicly available information and that prices instantly change to reflect new

public information. The strong form of the EMH additionally claims that prices instantly reflect

even hidden "insider" information. The financial crisis during 2007-09 revealed many problems

of understanding and learning by Fund Management firms about their own business models and

those of their investee companies (especially banks, Holland 2010). In addition, there has been

poor financial performance by many FMs when delivering investment services to investors

(Cuthbertson et al 2006, 2008). Holland (2011) argues that Trustees, FM investors, and investee

companies, all require shared knowledge in the form of a grounded theory of FM to overcome

these problems. Holland, (2006) notes the limits of conventional finance theory in explaining

FMs and their performance. Historic field research by Clarkson (1963), Holland and Doran

5
(1998), Hellman (2000), Holland (2006), revealed an embryonic grounded theory underlying FM

structure and behaviour. However, the results were fragmented and a more coherent explanation

of FM was required. Embryonic grounded theory of fund management does not address

questions concerning the role of knowledge in FM decision context and process, and their joint

role in search for novel information of value in investment decisions. It does not address the

dynamic nature of FM both immediate and longer term.

Table-01: Articles behind developing primary knowledge.

Year Author Concept

2003 S Arbeleche, M A H Portfolio management for

Dempster. pension fund

2010 Ben Jackson Micheni Charles The effects of portfolio

management strategy on

financial performance of

investment companies in

Kenya.
2011 By Leslie E. Christian A New Foundation for

Portfolio Management
2011 By Reza Hamzaee Modern Banking And

Strategic Portfolio

Management
2011 Pietro Cunha Dolci Antônio The dimensions of IT

Carlos Gastaud Maçada portfolio management – An

analysis involving managers

in Brazilian companies
2012 Johan Christian Hilstian Active Portfolio management

6
and portfolio construction-

implementing investment

strategy
2015 Khaira Amalia Fachrudina , The Study of Investment

Hilma Tamiami Fachrudin Portfolio Management and

Sustainability of Property and

Real Estate Companies in

Indonesia Stock Exchange

2016 N. Instefjord Investment management

7
CHAPTER 2

METHODOLOGY OF THE STUDY

Searching for the internship

opportunity
C
V
Internship at IDLC
C
V
Selection of the topic
C
V
Literature Review
C
V
Development of primary
knowledge
C
V
Data analysis
C
V
2.1 Research Design Report prepare

The research has been designed in this manner:

Report submission

8
2.2 Time frame of Data Collection

This report has been prepared on the basis of experience gathered during the period of internship

form 01/02/2020 to 07/04/2020. Within this period two divisions were visited namely Credit

Administration & IDLC Investment.

2.3 Type of Research

This is a quantitative research.

2.4 Sources of Data

The report is prepared by using only secondary data. Most of the information used in this report

has been collected from IDLC investment research department & various websites.

9
2.4.1 Type of data & Time Frame of Data

I have collected all the monthly closed price of companies in DSE for last 10 years so time frame

of the data is 10 years. All data is numerical data and worked done in the Microsoft Excel.

2.5 Criteria for Selecting Company

Before choosing the companies I have analyzed some of the criteria of the companies

 Price/ Earnings ratio

 Blue chip stocks

 DSE 30 Stocks

 Companies that are operating in the industries for more than or equal to 10 years.

I have selected 22 companies from different industries of Bangladesh and all of the companies

are in a very good position in the country. Also all the companies belong to the DSE 30 and also

doing businesses for more than or equal to 10 years.

2.5.1 Company Overview

ACI Limited: In 1973, the UK based multinational pharmaceutical company, ICI plc,

established a subsidiary in Dhaka, known as ICI Bangladesh Manufacturers Limited. In 1992,

ICI plc divested its share to local management, and the company was renamed Advanced

Chemical Industries (ACI) Limited. ACI formulates and markets a comprehensive range of more

than 387 products covering all major therapeutic areas, which come in tablet, capsule, powder,

liquid, cream, ointment, gel ,ophthalmic and injection forms. ACI also markets world-renowned

branded pharmaceutical products like Arimidex, Casodex, Zoladex, Atarax etc. from world-class

multinational companies like ASTRAZENECA, UK and UCB, BELGIUM in Bangladesh

10
BAT (Bangladesh): BAT Bangladesh is a part of British American Tobacco plc, one of the

world’s most international businesses, with brands sold in more than 200 markets around the

world. We make high quality tobacco products for the diverse preferences of consumers,

spanning the business 'from crop to consumer' and we are committed to embedding the principles

of corporate social responsibility Group wide.

Bangladesh Export Import Company (BEXIMCO):

Bangladesh Export Import Company Limited is the largest company within the BEXIMCO

Group and operates across multiple industry verticals. The company is present in textiles, real

estate & hospitality, marine food & commodities trading, ICT, ceramics and aviation.

The company's largest division is Textiles, which is a fully integrated manufacturer of cotton and

polyester blended garments.

Brac Bank: BRAC Bank is a private commercial bank in Bangladesh focused on Small and

Medium Enterprises. The bank has its head office in Dhaka, Bangladesh. It has 186 branches and

50 agent banking outlets and 448 ATM's as of 31 December 2018.

BSRM: The Bangladesh Steel Re-Rolling Mills Ltd., commonly known as BSRM, is a

Bangladeshi steel manufacturing company based in Chittagong. It is the largest construction steel

manufacturer company in Bangladesh.

Beximco Pharma: Beximco Pharmaceuticals Ltd (Beximco Pharma) is a leading manufacturer

and exporter of medicines in Bangladesh. Incorporated in the late 70s, Beximco Pharma began as

a distributor, importing products from global MNCs like Bayer, Germany and Upjohn, USA and

selling them in the local market, which were later manufactured and distributed under licensing

arrangement. Since then, the journey continued, and today, Beximco Pharma is one of the largest

11
exporters of medicines in Bangladesh, winning National Export Trophy (Gold) a record five

times.

Confidence Cement: Confidence Cement Limited is the pioneer cement manufacturing

company in private cement sector in Bangladesh under the Government Industrial policy of

1991. The company was established in May 02, 1991 is a form of public limited company.

Confidence Cement Limited, the flagship company of Confidence Group of Companies is one of

the largest producers of cement in the country. It is also a leading Blue-Chip company in both

Dhaka & Chittagong Stock Exchange and there it is among the top 20 performing companies for

the last 15 years.

City Bank: The City Bank is a Bangladeshi private commercial bank, operating throughout

Bangladesh. It is one of the few banks in Bangladesh with a centralized infrastructure. The

present CEO is GK Tahmid.

Eastern Bank: With a vision to become the bank of choice and to be the most valuable financial

brand in Bangladesh, Eastern Bank Ltd. (EBL) began its journey in 1992. Over the years EBL

has established itself as a leading private commercial bank in the country with undisputed

leadership in Corporate Banking and a strong Consumer and SME growth engines. EBL's

ambition is to be the number one financial services provider, creating lasting value for its

clientele, shareholder, and employees and above all for the community it operates in.

GrameenPhone: Grameenphone, widely abbreviated as GP, is the leading telecommunications

service provider in Bangladesh, with more than 74 million subscribers and 46.3% subscriber

market share. It is a joint venture between Telenor and Grameen Telecom Corporation.

12
IDLC: IDLC Finance Limited, formerly known as Industrial Development Leasing Company of

Bangladesh Limited, is a multi-product Non-Banking Financial Institution with headquarters in

Dhaka, Bangladesh

Lanka Bangla Finance: LankaBangla Finance Limited started its journey long back in 1997 as

a joint-venture financial institution with multinational collaboration having license from

Bangladesh Bank under Financial Institution Act-1993. Now LankaBangla is the country’s

leading provider of integrated financial services including corporate financial services, retail

financial services, SME financial services, stock broking, corporate advisory and wealth

management services. Under the broadest umbrella of products and service offerings, we are the

lone financial institution to operate credit card (MasterCard and VISA) and also provide third

party card processing services to different banks in Bangladesh. LankaBangla is a primary dealer

of government securities since November 2009. Since 2006 LankaBangla has been listed in both

DSE & CSE in Bangladesh.

Lafargeholdcime: LafargeHolcim Bangladesh Ltd.(LHBL) is a frontline cement producer in

Bangladesh. Operating for more than a decade, it has made about US$ 500 million investment in

building one fully integrated cement plant and three grinding plants --- the largest foreign direct

investment in the sector. It is a joint venture of LafargeHolcim and Cementos Molins. With state-

of-the art technology and well-groomed staff, the company produces world class cement to meet

the growing demand generated by massive infrastructure development programs and improved

socio economic conditions.

Meghna Petroleum : Meghna Petroleum Limited (MPL) was setup on December27,1977 under

Company Act 1913 (later on company Act 1994), as a private limited company with the

objectives of taking over the physical possession of all the fixed assets of the erstwhile Meghna

13
Petroleum Marketing Company Limited (MPMCL) and Padma Petroleum Limited (PPL) as on

March 31, 1978. Meghna Petroleum Marketing Company Limited was created after acquiring the

operation of the then ESSO Eastern Inc. (1962) of America in 1975 and Padma Petroleum

Limited was created in 1972 after acquiring the operation of the then Dawood Petroleum Limited

(1968).

National Bank: The National Bank Limited is a private limited bank in Bangladesh. Choudhury

Moshtaq Ahmed is the present Managing Director of the bank

National life Insurance: The era of privatized insurers started in Bangladesh with the

establishment of National Life Insurance Company, the first ever private life insurance company

introduced in the People’s Republic of Bangladesh. It started functioning on 23rd April, 1985 as

a result of sheer perseverance, endeavor and supervision of the founder chairman Mr. Alhaj M.

Haider Chowdhury. The company having 703 crore Premium income in the year 2012 with a

hefty Life fund of 2419 crore happens to be a dominant insurer and is moving fast on a new

growth trajectory surpassing its previous records.

Olympic Industries Limited: Olympic Industries Limited is a Bangladesh-based company,

which is engaged in manufacturing, marketing, distributing and selling of dry cell batteries,

biscuits, and candy and confectionery items and plastic products.

Pubali Bank: Pubali Bank is the largest private commercial bank in Bangladesh. It has more

branches than any other private bank in the country. Habibur Rahman is the present chairman of

the bank.

Renata: Renata Limited (formerly Pfizer Limited) is one of the leading and fastest growing

pharmaceutical and animal health product companies in Bangladesh. The company started its

14
operations in 1972 as Pfizer (Bangladesh) Limited. In 1993, Pfizer transferred the ownership of

its Bangladesh operations to local shareholders and the name of the company was changed to

Renata Limited.

Singer BD: The SINGER saga began in 1851, when Sir Isaac Merritt Singer with US$ 40 in the

borrowed capital began to manufacture and sell a machine to automate and assist in the making

of clothing. This revolutionary product was the first offering from the newly formed I.M. Singer

& Company, which has now evolved into the world leader in the manufacturing and distribution

of sewing related products. The SINGER brand name is now famous around the globe.

Square Pharmaceuticals Ltd: Square Pharmaceuticals Ltd. is a pharmaceutical company in

Bangladesh. It was founded in 1958 by Samson H. Chowdhury along with three of his friends as

a private firm.

Titas: The discovery of a huge gas field on the bank of the Titas River in Bhramanbaria in 1962

created a new horizon for the utilization of natural gas. Being established on November 20, 1964

Titas Gas Transmission and Distribution Company Limited (TGTDCL) has completed 50 years

of its operation. The company began its commercial operation with the commissioning of gas

supply to Siddhirganj Thermal Power Station on April 28, 1968 after construction of 14 inch dia

58 mile long Titas-Demra gas pipeline by the then East Pakistan Industrial Development

Corporation. As a progressive national organization, it has earned the glory of being a

trustworthy one for the people by means of the quality of service delivery.

2.6 Analysis Tools

The construction of optimal portfolios continues to be one of the key areas of present financial

research as it plays a crucial role in the process of the investment. First step in the process of

15
investment is to construct the optimal portfolio. Markowitz approach and the Sharpe single index

model are the prominent approaches to construct optimal portfolios. The number of inputs and

the computational complexity of quadratic optimization in Markowitz approach are the problems

that require a lot of time and energy. To overcome these problems, Sharpe proposed a model that

requires fewer inputs and computational simplicity. The most important issue is whether the

results of this simplified model are similar to those obtained using Markowitz model. As

reported in the chapter 4, some of the studies that were conducted to compare the optimal

portfolios using Markowitz and Sharpe single index approaches have come to conflicting

conclusions. While some of the studies have concluded that there is difference in the

characteristics of the portfolios constructed using Markowitz and Sharpe models, others have

concluded that there is no difference in the characteristics of the portfolios. This work attempts to

construct the optimal portfolios by applying Markowitz and Sharpe approaches, compare the

characteristics of the portfolios constructed and investigate whether there is any difference

between the results of these two approaches.

Markowitz Mean-Variance Model

The Markowitz mean-variance model attempts to minimize risk for a given level of expected

return, or equivalently maximize portfolio expected return for a given amount of portfolio risk.

The Markowitz mean-variance portfolio optimization problem can be formulated in the

following matrix forms:

I have done my research by using Markowitz Mean-variance model for creating portfolios.

Those methods are given bellow:

16
2.6.1 Creating optimal portfolio (Without Short sale)

The minimum variance frontier is a graph that is a graph of lowest possible variance that can be

attained for any given level of expected return. The global minimum variance portfolio is the

portfolio of risky assets that has the lowest variance of all risky assets portfolios. The efficient

frontier is the range of all investments that are within the minimum variance frontier and are

above (have a higher return than) the global minimum variance portfolio.

Return of the Asset Calculated as,

r (t )−r (t −1)
R=
r (t−1)

The expected return for a portfolio is calculated as:

n
E ( rp )=∑ wiE (ri)
i=1

The variance of two assets (x and y) portfolio is calculated as:

σ2P = w2x σ2x + w2y σ2y + 2 wxwyCov(rxry)

Generalizing the equation to accumulate more than two assets result in as:

n n
σ 2 P=∑ ∑ wiwjCov( rirj)
i=1 j=1

After we past two assets portfolio it is necessary to use matrix multiplication to determine the

optimal assets weighting the portfolio.

17
The expected return for the portfolio is calculated as,

E (ri)
E(rp) =WTR = [wi ........ wj] [ E (rj) ]

Where:

W is the vector of weights of the individual assets (I through j) in the portfolio.

R is the vector of expected return of the individual assets (I through j) in the portfolio.

The formula in Excel is {=mmult (transpose(W),R) }

When making calculation with arrays in Excel type in the formula, but don not press Enter,

Instead Hold Down (CTRL+Shift) and then press enter. This tells Excel that you are making a

calculation with an array and puts the curly parentheses around the formula.

The variance of the portfolios calculated as,

σ2P = WTS(W)

The standard deviation of the portfolio is calculated as,\

1
σii ⋯ σij wi

[ [ ][ ]
2

σ2P = √ WTS ( W ) = [ wi ⋯ wj ] ⋮ ⋱ ⋮ ⋮
σji ⋯ σjj wj

Where,

18
S is refer to as variance covariance matrix of the covariance between each assets return on the

portfolio. The covariance of an assets return with the return of the same assets (such as σii) is the

variance of asset’s return. The definition of W remain same as above.

The standard deviation of the return of portfolio is calculated as in Excel:

{=sqrt(mmult(mmult(transpose(W),S),W))}]

The Optimal Weights for assets in a portfolio are the ones that maintain the value of the sharp

ratio for the portfolio.

E ( rp )−rf
Sp =
σp

Capital Allocation and the separation property:

The optimal mix of the weights for the assets in the risky portfolio is the mix that creates a

portfolio along the efficient frontier that is the tangent with the capital allocation line (CAL) .

The results in the CAL with the largest slope (sharp ratio) and is therefore the optimal risky

portfolio.

The separation property says that there are two independent tasks involved with the portfolio

choice property. The first is the determining the optimal risky portfolio. This risky portfolio is

the best regardless of the level of risk aversion of Clients. The second task is the capital

allocation between the risky assets and risk free assets portfolio, which is based on individual

client’s risk aversion and the relative rate pf return for the risky portfolio and risk free assets.

E ( rp )−rf
Y*=
A σ2 P

19
Where Y* is the proportion of the portfolio invested in the risky assets portfolio and A is the

measure of investor’s risk aversion.

2.6.2 Plotting the Efficient Frontier

After you calculate the sharp ratio, you find the minimum variance portfolio using solver in the

excel, then you can guess the points between minimal variance portfolio and optimal portfolio

very easily then you try to finds your weights in that particular expected return. For that you can

use solver to find. Here you have to put an extra constraint. Suppose your expected return for

minimum variance portfolio is 10% and expected return for optimal portfolio is 20%. So you

have to find the weights that in the between of 10% To 20%. Suppose you are trying to find the

maximum value of sharp ratio where all the weights are equal to 1 and another constrain is

expected return is equal to 15%. You have to do it several times after that you will get enough

point for your efficient frontier.

2.6.3 Creating CAL Line

First of all in Bangladesh the risk free rate is 7% , so for no risk , means 0 standard deviation we

can get 7% return . If we consider that we can create CAL line by ;

CAL* = rf + Sharp ratio of optimal portfolio* σ2 of each assets

20
CHAPTER 3 RESULTS AND FINDINGS

3.1 Annual expected return of the assets

The annual expected return of all the assets are shown below:

21
Annual Expected returns
1%
5% 3%
6% 9%
2%
8% 6%
2% 0%
2%
7%
13%
3%
4%
9%
2%
3% 6% 3%
2%
3%

ACI BAT BEXI Brac BSRM BEXIPHAR

ConfiCEM City Bank Eas Bank GP IDLC LANKA
LargeHold MeghnaPetro NationalB NetLife OlymInds PubaliB
Renata Singer SqPhrma Titas

Here we can see that from our expected return analysis Olympic Industries gives us the highest

expected returns (33%), after that National life insurance (24.12%) and on third we have BAT at

22.5%.

3.2 Equally weighted portfolio:

If we create a portfolio where we will include all the 22 assets but no risk free assets than we will

get this:

22
Weights of the portfolio
0.05 0.05
0.05 0.05
0.05 0.05

0.05 0.05
0.05 0.05
0.05 0.05
0.05 0.05
0.05 0.05

0.05 0.05
0.05 0.05
0.05 0.05

ACI BAT BEXI Brac BSRM BEXIPHAR

ConfiCEM City Bank Eas Bank GP IDLC LANKA
LargeHold MeghnaPetro NationalB NetLife OlymInds PubaliB
Renata Singer SqPhrma Titas

So for the equally weighted portfolio our expected return is 10.96% and Std Dev. Is 24.09%.

3.3 Optimal portfolio:

After analysis the data in excel and solve with the solver we will get out optimal portfolio.

23
Weights in the optimal portfolio
0.50 0.46
0.45
0.40
0.35
0.30
0.25 0.21 0.21
0.20
0.15 0.12
0.10
0.05
0.00 0.000.000.000.000.000.000.000.000.000.000.000.000.00 0.00 0.000.000.00
0.00
I T I c R k k P C A d o B e s B a r a s
AC BA BEX Bra S RM HA CEM Ban Ban G IDL NK Hol etr nal tLif Ind ali nat nge rm Tita
B XIP nfi ty as
o Ci E LA rge naP atio Ne lym Pub Re Si qPh
B E C La egh N O S
M

Here you can see in the optimal portfolio we will only invest in 5 securities. almost 50% of the

capital will be invested in the BAT(0.46), then in the national life insurance 0.21 , in the Renata

also 0.21 , in the Olympic Industries 0.12 and a little bit in the Brac bank. So out of 22 stocks in

the optimal selection of the portfolio only 5 lefts.

In the optimal portfolio our expected return is 23.53%, Std.Dev. is 22.61%. So you can see the

differences that is huge.

We also get a sharp ratio of 73.10%.

3.3.1 Capital Allocation when investor is less risk averse

When we put risk aversion (A) as 5 we will get Y*=64.65% , that means we can allocate out

64.65% of the capital in the optimal risky portfolio and remaining capital will be invested in risk

free assets.

3.3.2 Capital Allocation when investor is more risk averse

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When we put risk aversion (A) as 5 we will get Y*=32.32% , that means we can allocate out

32.32% of the capital in the optimal risky portfolio and remaining capital will be invested in risk

free assets.

3.4 Efficient Frontier

Efficient Frontier And Capital Allocation LIne

0.35

0.30 0.29

0.26
0.25
0.24
0.24
0.21
0.21
Expected Returns

0.20 0.20
0.20
0.20 Efficient Frontier
Linear (Efficient Frontier)
Capital Allocation Line
0.15

0.10

0.07
0.05

0.00
0.00 0.05 0.10 0.15
Standard 0.20
Deviation 0.25 0.30 0.35

EXPECTED STD DEV SHARP

RETURN PORT RATIO CAL
Risk free
assets 0 0.07
0.12 0.18 0.28 0.20
0.14 0.18 0.40 0.20
MIN 0.16 0.17 0.52 0.20
0.17 0.17 0.57 0.20
0.20 0.19 0.69 0.21
0.21 0.20 0.71 0.21
OPTIMA
M 0.24 0.23 0.73 0.24 25
0.24 0.23 0.73 0.24
0.26 0.27 0.71 0.26
0.28 0.31 0.68 0.29
So in the efficient frontier is the set of optimal portfolios, if you between the minimum variance

portfolio and optimal portfolio our efficient frontier lies. But before and after that those are

inefficient portfolios. Because those portfolios give lower expected return for the higher or equal

standard deviation.

Before we have constructed our optimal portfolio and sharp ratio, now by constructing Efficient

frontier and CAL we can see that CAL intersect at the exact point in the efficient frontier where

our optimal portfolios lies . So our method is absolutely correct and accurate.

26
CHAPTER 4 FINDINGS AND RECOMMANDATIONS

4.1 Recommendations

 I would suggest investors to avoid investing in equally weighted portfolios.

 I would suggest investors to avoid investing in inefficient portfolios.

 I would suggest investors to invest in optimal portfolio.

 I would suggest risk averse investors to invest in minimum variance portfolio.

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4.2 Conclusion

Two types of risk adjustment procedure have been considered, those that adjust for the total risk

of the portfolio (the coefficient-of-variance and Sharpe measures) (Optimal portfolio) and those

that are risk averse (Y*). The use of these measures is now considered.

From this method a portfolio advisor can suggest both risk averse and risk takers investors. This

is very helpful for constructing portfolios in the different risk taking investors.

Note, however, the benefits suggested by diversification. By combining portfolios that have

positive excess returns after adjusting for systemic risk, but negative excess returns after

adjusting for total risk, the creation of a portfolio of portfolios that has positive excess returns -

even after adjusting for total risk - may be possible.

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APPENDIX AND REFERENCE

29
Appendix:

30
31
Reference:
 https://www.investing.com/equities/renata-ltd-historical-data
 https://www.investing.com/equities/titas-gas-transmission-distribution
 https://www.investing.com/equities/brac-bank-ltd
 https://dsebd.org/dse30_share.php
 https://www.sciencedirect.com/science/article/abs/pii/0304405X76900040
 https://ideas.repec.org/a/ris/jqmumt/0024.html
 www.idlc.com

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