Assignment on – "Final Assessment"

Submitted to – Dr. Hasmat Ali

Professor, Department of Finance

University of Chittagong.
Submitted by -

Name ID

Hossain Mohammad Yeasin 171006502

Course title – Investment analysis & portfolio management.

Course code – FIN 404

Submission date – 25th April 2020
 Answer to the question no -1
Intrinsic Value - In finance, intrinsic value or fundamental value is the "true, inherent, and

essential value" of an asset independent of its market value. Importance of intrinsic value to

determine the intrinsic value of securities – securities is a form of stock. to calculate the intrinsic

value of a securities, first calculate the growth rate of the dividends by dividing the company's

earnings by the dividends it pays to its shareholders. Then, apply a discount rate to find your rate

of return using present value tables.

Answer to the question no - 2

Various methods of determining the value of securities write their benefits and limitations -

A. Asset-Backing Method - Since the valuation is made on the basis of the assets of the

company, it is known as Asset-Basis or Asset- Backing Method. At the same time, the

shares are valued on the basis of real internal value of the assets of the company and that

is why the method is also termed Intrinsic Value Method or Real Value Basis Method. This

method may be made either - On a going/continuing concern basis and Break-up value

basis.

B. Yield-Basis Method - Yield is the effective rate of return on investments which is invested

by the investors. It is always expressed in terms of percentage. Since the valuation of shares

is made on the basis of Yield, it is called Yield-Basis Method. Under Yield-Basis method,

valuation of shares is made on - Profit Basis & Dividend Basis.

C. Fair Value Method - There are some accountants who do not prefer to use Intrinsic Value

or Yield Value for ascertaining the correct value of shares. They, however, prescribe the

Fair Value Method which is the mean of Intrinsic Value Method end Yield Value Method.
 The same provides a better indication about the value of shares than the earlier two

methods.

D. Return on Capital Employed Method - Under this method, valuation of share is made on

the basis of rate of a return (after tax) on capital employed. Rates of return are taken on

the basis of predetermined rates of return which an investor may expect on the

investments. After ascertaining this expected earnings, we are to determine the capital

sum for such a return.

E. Price-Earnings Ratio Method - We know that it is the ratio which relates the market price

of the share to earning per equity share.

Answer to the question no - 3

An investor evaluate the performance of securities explain -

Choosing investments is just the beginning of work as an investor. As time goes by, he will need

to monitor the performance of these investments to see how they are working together in his

portfolio to help his progress toward his goals. Generally speaking, progress means that investor’s

portfolio value is steadily increasing, even though one or more of his investments may have lost

value. If his investments are not showing any gains or his account value is slipping, he will have

to determine why, and decide on his next move. In addition, because investment markets change

all the time, he will want to be alert to opportunities to improve his portfolio's performance,

perhaps by diversifying into a different sector of the economy or allocating part of his portfolio to

international investments. To free up money to make these new purchases, he may want to sell

individual investments that have not performed well, while not abandoning the asset allocation he

have selected as appropriate.

 Answer to the question no - 4
Various methods of measuring the performance of portfolio & their strengths and
weaknesses.
Treynor Measure - Jack L. Treynor was the first to provide investors with a composite measure

of portfolio performance that also included risk. Treynor's objective was to find a performance

measure that could apply to all investors regardless of their personal risk preferences. Treynor

suggested that there were really two components of risk: the risk produced by fluctuations in the

stock market and the risk arising from the fluctuations of individual securities.

Sharpe Measure - is almost identical to the Treynor measure, except that the risk measure is the

standard deviation of the portfolio instead of considering only the systematic risk as represented

by beta. Conceived by Bill Sharpe, to this measure closely follows his work on the capital asset

pricing model (CAPM) and, by extension, uses total risk to compare portfolios to the capital

market line.

Jensen Measure - Similar to the previous performance measures discussed, the Jensen measure

is calculated using the CAPM. Named after its creator, Michael C. Jensen, the Jensen measure

calculates the excess return that a portfolio generates over its expected return. This measure of

return is also known as alpha.

Advantages Disadvantages

Sharpe Ratio easy to calculate, Overstates if the historical prices used, it is overstated if the return

are smoothen, it can be manipulated by the fund managers if non-linear derivatives are used.

Treynor Ratio easy to calculate, It is a control for market risk exposure, It can be overstated if

market neutral strategies are used, it can be overstated if the asset used in portfolio have recently

leveraged, It’s not a proper measure for undiversified portfolios.

Jensen's Alpha easy to calculate, it rewards the stock selection ability of fund manager, It doesn't

consider the advantages of a diversified portfolio, It also doesn't consider the positive skewness in

the portfolio.

Answer to the question no - 5

Various types of stocks and prospects of returns from those stocks –
Common Stock - Common stock is, well, common. When people talk about stocks in general they

are most likely referring to this type. In fact, the majority of stock issued is in this form. We

basically went over features of common stock in the last section. Common shares represent

ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote

per share to elect the board members, who oversee the major decisions made by management.

Over the long term, common stock, by means of capital growth, yields higher returns than almost

every other investment. This higher return comes at a cost since common stocks entail the most

risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money

until the creditors, bondholders, and preferred shareholders are paid.

Preferred Stock - Preferred stock represents some degree of ownership in a company but usually

doesn't come with the same voting rights. (This may vary depending on the company.) With

preferred shares investors are usually guaranteed a fixed dividend forever. This is different than

common stock, which has variable dividends that are never guaranteed. Another advantage is

that in the event of liquidation preferred shareholders are paid off before the common

shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the

company has the option to purchase the shares from shareholders at any time for any reason.
Some people consider preferred stock to be more like debt than equity. A good way to think of

these kinds of shares is to see them as being in between bonds and common shares. (If you don't

understand bonds make sure also to check out our bond tutorial.)

Answer to the question no - 6

Various categories of shares listed at DSE and CSE -
Categories of share listed at DSE are -

A-Category Companies: Companies which are regular in holding the annual general meetings

and have declared dividend at the rate of ten percent or more in the last English calendar year.

B-Category Companies: Companies which are regular in holding the annual general meetings

but have failed to declare dividend at least at the rate of ten percent in the last English calendar

year.

G-Category Companies: Green-field companies of which shares are listed with the DSE before

the company goes into commercial operation and prior to listing the said company declares the

year of first declaration of dividend.

N-Category Companies: Newly listed companies except green-field companies which shall be

transferred to other categories in accordance with their first dividend declaration and respective

compliance after listing of their shares.

Z-Category Companies: Companies which have failed to hold the annual general meeting when

due or have failed to declare any dividend based on annual performance or which are not in

operation continuously for more than six months or whose accumulated loss after adjustment of

revenue reserve, if any, exceeds its paid up capital.

Three categories of DSE indexes are –

DSI: DSI represent the DSE all-Share Price index for the Dhaka Stock Exchange (DSE).
DGEN: It represents the General Index of DSE. This includes the all stocks of the DSE except the

“Z” categories.

DSE 20: DSE 20 is an index where the best twenty stocks are listed.

Two types of CSE index are

CSE 30: CSE 30 is an index where the best thirty stocks are listed. The best thirty performing

stocks information, movement, overall information is provided here.

CSCX: It represents the Chittagong Special Categories Index. Here all the stock including the Z

category stock is also included.

Answer to the question no - 7

Uses of beta and standard deviation in investment decision -
Beta is useful in determining a security's short-term risk, and for analyzing volatility to arrive at

equity costs using CAPM. However, the since beta statistic is calculated using historical data

points, it becomes less meaningful for investors looking to predict a stock's future movements.

Standard deviation determines the volatility of a fund according to the disparity of its returns

over a period of time.

An investor measure beta and standard deviation -

An investor measures Beta and standard deviation by which a portfolio or fund's level of risk is

calculated. Beta compares the volatility of an investment to a relevant benchmark while standard

deviation compares an investment's volatility to the average return over a period of time.
 Answer to the Question no - 13
Portfolio A’s Returns, rA Portfolio B’s Returns, rB ER(X)(If B is
Year
benchmark)
2013 -18 -14.5 -3.5
2014 33 21.8 11.2
2015 15 30.5 -15.5
2016 -0.5 -7.6 7.1
2017 27 26.3 0.7
Avg. return 11.3 11.3
SD 20.8 20.8 10.4

RFR 4
Market return 12

Beta(β) 1.6 0.9

ER= Rf+(Rm-Rf)*beta 16.8 11.2

A
i. Sharpe’s Measure:

𝐴̅ −𝑅𝐹𝑅
For A, 𝑆𝐷

11.3−4
= 20.8

=0.35114

̅ −𝑅𝐹𝑅
𝐵
For B, 𝑆𝐷

11.3−4
= 20.8

=0.35135
 ii. Treynor’s Measure:

𝐴̅ −𝑅𝐹𝑅
For A, 𝛽

11.3−4
= 1.6

=4.56

̅ −𝑅𝐹𝑅
𝐵
For B, 0.9

11.3−4
= = 8.11
20.8

Jensen’s Measure

In this method, Expected Return is required which is considered above and shown as ER.

For Portfolio A, α= RR (𝐴̅)-ER

= 11.3-16.8

= -5.5

For Portfolio B, α= RR (𝐵̅)-ER

= 11.3-11.2

= 0.1

B
For Information ratio for portfolio A we have to take portfolio B as benchmark. So average return

of B is now average return of Benchmark, which is 11.3. After the calculation, the SD of

Benchmark will be SD of ER = 10.4

 𝐴̅−̅̅̅̅̅
𝐵𝑀
IR= 𝑆𝐷 𝑜𝑓 𝐸𝑅

11.3−11.3
= 10.4

=0

C
My suggestion & observation about the finding is - Sharpe, Treynor and Jensen’s method of

measuring, I can see that the value of B is greater than the A. So, it is said that, portfolio B is

better than all three measures. Here IR for portfolio A is 0. And information ratio of less than

0.4 means that the portfolio was unable to produce additional returns for extended periods of

time. So this portfolio should be evaded if I consider portfolio B as benchmark