Course name with code: Investment Management (FIN460)

Assignment Topic: Stock Selection, Valuation, Diversification, and Portfolio Construction

Submitted By
Name ID Student’s Sign

Salma Siddique 1711394

Zulqarnain Bin Khalique Asif 1710182

MD Nishad Miah 1721014

Fozla Rabbi 1710833

Nishat Nawar Khan 1821429

Submitted To
Mr. Mohammad Fahad Noor

Date of Submission (September 27, 2020)

 Letter of Transmittal
Date: 27th September, 2020
Mr. Mohammad Fahad Noor
Lecturer
School of Business and Entrepreneurship
Department of Finance
Independent University, Bangladesh (IUB)

Subject: Assignment on Stock Selection, Valuation, Diversification, and Portfolio Construction

Dear Sir,

We, the students of section 01, FIN460 have completed the assignment on stock selection,
valuation, diversification, and portfolio construction
The assignment has been completed by the information that we have gathered from the course
“Investment Management”.
We, would, also like to draw your attention that we have tried our level best to complete this
assignment correctly, and gather appropriate information as much as possible. We have tried our
best to live up to your standards.
May we, therefore wish and hope that you would be cordial enough to our hard work and oblige
us thereby.
Thank you very much for your support and patience.
Yours Sincerely,

Name ID
Salma Siddique 1711394
Zulqarnain Bin Khalique Asif 1710182
MD Nishad Miah 1721014
Fozla Rabbi 1710833
Nishat Nawar Khan 1821429
 Acknowledgement
Firstly, we would like to express our deepest gratitude to Almighty God for giving us the strength
and the composure to finish the task within the scheduled time.
We would like to express our sincere gratitude to the instructor Mr. Mohammad Fahad Noor
for the continuous support, for his patience, motivation, enthusiasm and immense knowledge. His
guidance helped us to plan and write this report. We could not have imagined having a better
advisor and mentor like him.
The assignment is based on stock selection, valuation, diversification, and portfolio construction.
We analyzed the trading days and found their various values based on the assignment requirement
and create the report.
This assignment would not have been possible without continuous support of many individuals.
Our group members are Salma Siddique, Zulqarnain Bin Khalique Asif, MD Nishad Miah,
Fozla Rabbi, Nishat Nawar Khan who worked hard for this project. We would like to say “Thank
You” to everyone.
Finally, we would like to thank our family for supporting us spiritually throughout this assignment.

Thank You.
Table of Contents
Executive Summary ....................................................................................................................1

Stock Selection............................................................................................................................2

Investor Characteristics and Objectives ...................................................................................2

Blue Chip Stocks Characteristics .............................................................................................2

Individual Company Analysis ..................................................................................................2

British American Tobacco Bangladesh Company Limited ...................................................2

Advanced Chemicals Limited ..............................................................................................4

Berger Paints Bangladesh Limited .......................................................................................5

Eastern Insurance Company Limited ...................................................................................7

Monno Ceramic Industries Limited......................................................................................8

Dhaka Electric Supply Company Ltd ...................................................................................9

Grameenphone Ltd. ........................................................................................................... 10

IDLC Finance Ltd.............................................................................................................. 11

Aftab Automobiles Ltd. ..................................................................................................... 12

Bata Shoe Company Bangladesh Limited .......................................................................... 13

Intrinsic Value and Dividend Discount Model ........................................................................... 15

Capital Expectation ................................................................................................................... 16

Average Return ..................................................................................................................... 16

Variance ................................................................................................................................ 17

Standard Deviation ................................................................................................................ 17

Beta ....................................................................................................................................... 17

Covariance ............................................................................................................................ 17

Correlation ............................................................................................................................ 17
Trading Days ............................................................................................................................. 17

Portfolio Selection ..................................................................................................................... 20

Efficient Fontier .................................................................................................................... 20

Diversification Benefit .......................................................................................................... 21

Portfolio Performance ............................................................................................................... 21

Sharpe Measure ..................................................................................................................... 21

Treynor Measure ................................................................................................................... 21

Jensen Measure ..................................................................................................................... 22

Recommendation ...................................................................................................................... 22

Conclusion ................................................................................................................................ 22

References................................................................................................................................. 23
 Executive Summary
This assignment is based on the research we have done for 10 stocks of our choice that we want to
invest in.

Firstly, we selected a particular stock criterion we want to invest in, then we selected companies
based on it. Then we discussed about the market capital expectations using the average return,
variance, standard deviation, covariance and correlation and beta for each of the ten stocks. We
also found the intrinsic value of the ten stocks using dividend discount model.

The Portfolio has been diversified to reduce the risk and three measures have been used to decide
the best combination of stocks that we should invest in.

Page | 1
 Stock Selection
Investor Characteristics and Objectives
Our aim is to receive income on regular basis. Our Objective is to receive returns but the company
needs to be a financially stable company that will reduce the risk. Therefore, as investors Blue
Chip Stocks category falls under the desirable category for our investment. We chose ten stocks
from DSE to complete our assignment.

Blue Chip Stocks Characteristics

A Blue Chip Stocks are well established company with healthy financial performance and stable
record of earnings and dividends. In order to be a Blue Chip Stocks, it needs to fulfill certain
characteristics:

 Large market share

 Well established company
 High value
 Strong Balance Sheet
 Paying dividend on regular basis

Also, Blue Chip stocks are the best for market downturn situation as well. The ten stocks have
been analyzed and discussed below.

Individual Company Analysis

British American Tobacco Bangladesh Company Limited

Page | 2
Company Overview

British American Tobacco company is one of the multinational corporation known for selling
tobacco and other nicotine products. It is one of the biggest multinational corporation in
Bangladesh. It is doing it in Bangladesh for over 100years. Moreover, it’s one of the renowned
brand for selling more than 200 products around the world.

The corporation currently has more than 1200 direct employees and over 50000 indirect
employees (farmers)

Company Analysis

BATBC was enlisted in the Dhaka Stock exchange during 1977. The company is categorized as
A company since it has meeting annually and pays the dividend to the stockholders on regular
basis.

As depicted from the picture, the company has paid cash dividends to the stockholders annually
and the last AGM meeting took place on 22nd April, 2020.

Page | 3
On September 24th, 2020 BATBC closing price was BDT1,145.20 and a Market Capitalization
of 206,136000. Despite the pandemic, BATBC market capitalization has been growing in the
industry.

Advanced Chemicals Limited

ACI Limited which was known as Imperial Chemical Industries established a branch in East
Pakistan and converted into a company after the liberation It was then name as ICI Manufacturers
Limited. In 1992 after it divested into Bangladesh Management, it was named as Advanced
Chemicals Limited.

ACI Limited is one of the largest conglomerates in Bangladesh which has four strategic business
unit.

Company Analysis

ACI Limited Company was listed in DSE during 1976 and categorized as A Listed Company.
Since they have annual general meeting. Moreover, they pay the dividends on regular basis.

Page | 4
As depicted in the picture, the company have paid cash dividends to the stockholders annually and
had AGM on 23rd December, 2019. Also, they have a reserve cash for its future growth.

During 24th September, 2020 it had its closing price of BDT256.30 and market capitalization of
14,704.689.

Berger Paints Bangladesh Limited

Berger has been one of the oldest paint industry. Louis Berger, a Germany founder evolved
production of dyes and pigments into paints and coatings.

During 1950, Berger was in the Paint business and imported its paints in Berger Pakistan. In 1970,
Berger established its paint business in Chittagong and the shareholders were Jenson & Nicholson
(J & N), Duncan Macneil & Co. Limited and Dada Group. After the independence of Bangladesh,

Page | 5
Dada Group were invested in Bangladesh. Moreover, Duncan Macneil & Co. Limited sold most
of its shares to J & N who then changed its name into Berger Paints Bangladesh Ltd.

Company Analysis

In December 2005, Berger Paints Bangladesh limited sold its 5% shares to the public through DSE
and CSE and officially listed in year 2006. Since then the company has been able to maintain its
position and categorized as A listed company.

As shown in the picture, the company had paid cash dividends to the stockholder annually and
held its last AGM meeting on 28th July, 2020.

During 24th September, 2020 it had its closing price of BDT1401.20 and market capitalization of
64,984.685.

Page | 6
Eastern Insurance Company Limited

Eastern Insurance Company has one of the pioneer insurance company in Bangladesh. Currently,
the company has 25 Branches all over Bangladesh and provides services based on their slogan,
“The Symbol of Comprehensive Study”.

In 1994 Eastern Insurance Company Limited listed in DSE and has been categorized as A listed
company for have annual general meeting regulary.

As shown in the picture, Eastern Insurance Company Limited has been able to pay a consistent
percentage of cash dividend to the stock holders and maintain reserve cash for its future growth.

Page | 7
During 24th September, 2020 it had a closing price of BDT99.40 and Market Capitalization of
4,285.148.

Monno Ceramic Industries Limited

Monno Ceramic Industries Limited is one of the oldest company for selling ceramics.

It was listed during 1983 in DSE and categorized as A listed company.

As depicted in the picture, Monno Ceramic has paid cash dividend on regular basis. Moreover,
paid bonus issues in terms of stock dividend. Also, the company had surplus for future growth. It
had its’s last AGM on 19th December, 2019.

Page | 8
The company has a Market Capitalization of 5227.513.

Dhaka Electric Supply Company Ltd

DESCO is a Public Limited Company which solely provides electricity to the general public in
Bangladesh.

It has enlisted in year 2006 and categorized as A.

Page | 9
Since it’s a Public Limited Company, the cash dividend has been consistent. Moreover, the
company paid bonus issue in terms of stock dividend to the current stockholders and able to keep
enough reserve for future growth.

The Market Capitalization for DESCO is 14829.354.

Grameenphone Ltd.

Grameenphone is one of the biggest private telecommunication operator in Bangladesh. In 1996

Grammenphone was a private limited company which later converted to public limited company.
It’s a joint venture with Telenor and Grameen Telecom.

GP was listed in 2009 and categorized as A company. Moreover, it has the highest shares, high
value and market leader in the telecom industry.

Page | 10
The company has paid cash dividend annually and maintained a certain amount of reserve as well.

During 24th September 2020, its closing price were 336.60 and Market Capitalization of
454510.987.

IDLC Finance Ltd.

The company was founded on 1985 and one of the biggest Non-Banking Financial Institution in
Bangladesh.

It was listed in the year 1992 and categorized as A.

Page | 11
It had its last AGM on 27th June 2020.

Despite the Pandemic, IDLC Finance Ltd Market Capitalization is 21, 152.549 with a closing price
of 56.10.

Aftab Automobiles Ltd.

In the year 1967, Aftab Automobiles Ltd. was incorporated as Private Limited company which
then converted to Public Limited Company. Currently, Aftab Automobiles Ltd. is one of the largest
assembler manufacturer of Toyota and Hino in Bangladesh.

Page | 12
In 1987, it listed in DSE and still categorized as A listed company due to its success in the industry.
Moreover, the company is paying cash dividend annually as depicted below.

It had its last AGM on 23rd December, 2019.

On September 24, 2020 the closing price was 27.70 and a Market Capitalization on 2, 651.70.

Bata Shoe Company Bangladesh Limited

In 1962, Bata Shoe Co. Ltd. started its operation. Currently, it has two manufacturing facilities one
in Tongi and the other in Dhamrai with a capacity of 160,000 pairs of shoes daily. Bata has been
widely popular for producing fashionable shoes and for school shoes.

Page | 13
It was listed in DSE in 1985 and categorized as A. Also, Bata Shoe is one of the pioneering
company in its industry that gives tremendous Cash Dividend to its Stockholders as shown below.

IIt had its last AGM on 10th September, 2020.

Currently, the Market Capitalization for Bata Shoe Co Ltd. is 9753.840.

Financial Position Based on the Annual Report.

Earning Per Share

180 166.87
160
130.5
140
120
100 78.02 72.01 82.34
72.79
80
60 26.41
26.04
40 20.31 6.13 25.8
2.11 4.12
20 3.47 3.56
0.11 1.180.44 5.49 2.89
0

2017 2018

Page | 14
 Net Asset Value Per Share
385.21
400
347.11
350
300 260.95
231.44 243.72 219.36
250
200 164.05

150
94 91 37.78 60.89
100 33.41 59.26
26.01 31.38 40.76 42.53 38.89 30.82
50 23.7

2017 2018

Cash Dividend
600% 600%
600%
500%
500%
335%
400% 330%
280%
300%
205% 200%
115%
30%
200% 20% 115%
10%
100% 5% 30%
20% 5% 10% 15% 16%
0%

2017 2018

Intrinsic Value and Dividend Discount Model

In order to find the intrinsic value, firstly we extracted the Dividend value of the year 2015-2018
from investing.com which was then used to find the rate of changed. The differences were then
average using the formula “=Average” to find the growth rate of each company.

Page | 15
The Risk-free rate was used based on the 91 trading days of 2019 and Beta were found by
calculating from the trading days.

The risk-free rate and the market return was subtracted to find the values of market risk premium.

Finally, the required rate of return was found using the formula, “Risk-free rate+ (Beta*Market
Risk Premium)”.

By using the required rate of return we found the PV of dividend year 2015-2018. We then found
the year 5 value using the growth rate. These were then added. As a result, we found intrinsic
value.

BATB GP Bata IDLC Berger EIC MONNO DESCO AFTAB ACI

Price 6622 121 637 1727 43 -2 1 1 2 429

Market 3464.20 365.60 1112 72 364.10 20.20 265.70 40.10 47.40 154.50
Price

If the stock price is below the market price, it means it is undervalued and the investors are willing
to buy it. If the stock price is above the market price, it is overpriced. The investors will not
purchase it.

Capital Expectation
To find the capital expectation we calculated the average return, variance, standard deviation,
covariance and correlation and beta for each of the ten stocks. Moreover, from the covariance and
correlation it can be inferred that the risks of the stocks are diversified.

Average Return
The average return calculates the series of return generated over period of time. Based on our
calculations some of the years have negative return and some of the years have positive return.
Therefore, the stocks have been performing both good and poor compare to the market.

Page | 16
Variance
Variance measures the difference between the return of a stock and its average return. Through,
variances, optimal portfolio can be developed by optimizing the return-volatility trade-off in
investment portfolios. If the variance is high, it means the security has high volatility and lower
than expected. If the variance is low, it means the security has low volatility and returns are close
to its average. To calculate variance in excel, we used the formula “=var.p(all returns of individual
stock)]”

Standard Deviation
Standard deviation is the statistical measure of market volatility that shows how widely the prices
are dispersed compared to its average price. The higher the standard deviation, the higher the risk
of the stock. To calculate the standard deviation, we used the formula, “=sqrt(variance)”.

Beta
Beta portrays the systematic level of risk. Therefore, ACI, AFTAB, IDLC has the higher risk since
Beta is more than 1.

Covariance
Covariance measures the direct relationship of two assets. If the covariance is positive, the asset
returns move together. On the other hand, negative covariance means they are inversely related.
To calculate we used the formula, “=covariance.p(all return of stock A, all return of stock B” for
all 10 stocks in different combinations.

Correlation
Correlation is a statistic that measures the relationship between two securities. Correlation values
must fall between -1 and +1. A perfect positive correlation means the correlation coefficient is
exactly 1 and if one security increases, the other security will increase as well. If the coefficient is
reducing, the other security will decrease as well. To calculate we used the formula, “=correl(all
return of stock A, all return of stock B)” for all 10 stocks in different combinations.

Trading Days
After monitoring for 16 trading days from 1 st September to 22nd September for 10 stocks of each
portfolio. We have calculated all the returns of each stock of the following sixteen trading days by

Page | 17
using the formula “= (current month closing price – previous month closing price) / previous
month closing price”, then we calculated the average return using the “=AVERAGE (all returns)”,
formula then we found variance using “=VAR.P (all returns)” and then we used variance value to
find standard deviations by using “=SQURT(variance)”. Finally, we calculated the beta using
“=COVARIANCE.P(all returns), (all market price)/ VAR.P(all market price)” formula.

We constructed 45 portfolios as shown below.

1. BATBC,GP
2. BATBC,BERGERPBL
3. BATBC,EASTERNINS
4. BATBC,MONNOCERA
5. BATBC,DESCO
6. BATBC,IDLC
7. BATBC,AFTABAUTO
8. BATBC,ACIFORMULA
9. BATBC,BATASHOE
10. GP,BERGERPBL
11. GP,EASTERNING
12. GP,MONNOCERA
13. GP,DESCO
14. GP,IDLE
15. GP,AFTABAUTO
16. GP,ACIFORMULA
17. GP,BATASHOE
18. BERGERPBL,EASTERNING
19. BERGERPBL,MONNOCERA
20. BERGERPBL,DESCO
21. BERGERPBL,IDLC
22. BERGERPBL,AFTABAUTO
23. BERGERPBL,ACIFORMULA
24. BERGERPBL,BATASHOE

Page | 18
 25. EASTERNINS,MONNOCERA
26. EASTERNINS,DESCO
27. EASTERNINS,IDLC
28. EASTERNINS,AFTABAUTO
29. EASTERNINS,ACIFORMULA
30. EASTERNINS,BATASHOE
31. MONNOCERA,DESCO
32. MONNOCERA,IDLC
33. MONNOCERA,AFTABAUTO
34. MONNOCERA,ACIFORMULA
35. MONNOCERA,BATASHOE
36. DESCO,IDLC
37. DESCO,AFTABAUTO
38. DESCO,ACIFORMULA
39. DESCO,BATASHOE
40. IDLC,AFTABAUTO
41. IDLC,ACIFORMULA
42. IDLC,BATASHOE
43. AFTABAUTO,ACIFORMULA
44. AFTABAUTO,BATASHOE
45. ACIFORMULA,BATASHOE

These portfolios are measured equally, therefore, weighted 0.5 each. We used 16 trading

days and calculated the correlation, portfolio return, risk and beta. To find the portfolio return we
used “=sum(all return of stock A)*weight + sum(all return of stock B)*weight”, portfolio variance

formula “=(weight^2*average return stock A^2) + (weight^2*average return stock B^2) +

(2*weight*weight*stock A average return*stockB average return* correlation of AB)”, standard

deviation formula “=sqrt(portfolio variance)” and lastly beta formula “=(weight*stock A beta) +

(weight*stock B beta)”.

Page | 19
 Portfolio Selection
Efficient Fontier

The efficient frontier was analyzed and created based on the risk-return we calculated in the excel.
As shown in the diagram, the stocks that occupies the efficient frontier are:

1. BATBC,AFTABAUTO
2. BATBC,GP
3. BATBC,IDLC
4. GP,BATASHOE,
5. MONNOCERA,AFTABAUTO
6. MONNOCERA,IDLC
7. BATBC,MONNOCERA.
8. GP,EASTERNING
9. AFTABAUTO,BATASHOE
10. GP,DESCO

Page | 20
The efficient frontier is the set of optimal portfolios that offers the highest return for a defined
level of risk. These stocks depict based on the diagram that these combinations will earn highest
return for a certain level of risk.

Diversification Benefit
Having portfolio diversified is one of the main principle of investment. This is to ensure that one
does not have to rely on particular investment to receive all the benefits. Also, the diversification
reduces the capital loss of the investment portfolio.

Some of the advantages of portfolio diversification have been described below:

1. Loss Minimization: If one of the investment performs poor for a certain period of time,
the other investment might perform well. This will reduce the potential losses an investor
might face. As a result, the investor can rely on other investment and not entirely face loss
on all the stocks.
2. Returns: In diversified portfolio returns will be generated. It might be high or low return.
Since the diversified portfolio does not specifically rely on single industry investment.
3. Preserving Capital: Through diversified portfolio, investors can save their savings
benefits by not entirely making losses.

Portfolio Performance
This portfolio performance was then measured using three measures described below.

Sharpe Measure
The Sharpe measure is used to help investors understand the return of an investment compared to
its risk. The formula of Sharpe measure is “(Portfolio return – risk free) / portfolio standard
deviation”

Treynor Measure
Treynor measures the returns earned in excess of that which could have been earned on an
investment that has no diversifiable risk, per unit of market risk assumed. Formula of Treynor
measure “(portfolio return – risk free) / portfolio beta”.

Page | 21
Jensen Measure
Jensen measure determines portfolios expected excess return over its theoretical expected return.
Formula of Jensen measure “[(portfolio return – risk free) + beta (Market return – risk free)]”

For Sharpe Measure, Treynor and Jensen measure BATBC,MONNOCERA have the highest
performance. Therefore, among all the portfolios BATBC,MONNOCERA is the best decision to
invest in. Investing in these two stocks the risk will be diversified.

Recommendation
We calculated the portfolio return, variance, sd, beta and correlation using two combination of
assets.

However, theory differs from reality. In reality, if we combined more stocks such as take three
combinations or four combinations of securities we could have received factual data that would
have allowed us to make better decisions in selecting the stocks. As a result, we would have chosen
the right stocks based on our needs. Since in Bangladesh, the stock return and market price
fluctuates.

Conclusion
We have done through research and selected stocks based on fluctuating market of Bangladesh.
Moreover, based on our demands we chose the stocks that would ensure steady dividends. Also,
we ensured they are well-established businesses since this will ensure that we will receivable
dividends for a long period of time.

The amount of cash dividend is also good for all the stocks and the returns proves it as well. Also,
after drawing the efficient frontier we found 10 stocks that gives the high return based on certain
level of risks. After using three measures, we found BATBC,MONNOCERA having the highest
performance. It was also in the efficient frontier. Thereby, proving our research were accurate and
selecting this combination would be the right choice for us.

Page | 22
 References
1. Scott Smart, Lawrence Gitman, and Michel Joehnk, “Fundamentals of Investing- 12th
Edition”
2. Dhaka Stock Exchange. Retrieved from: https://www.dsebd.org/
3. Investing.com - Stock Market Quotes & Financial News. Retrieved from:
https://www.investing.com/
4. Bb.org.bd. Retrieved from: https://www.bb.org.bd/monetaryactivity/treasury.php

Page | 23