Introduction:

There are different types of investors who are tempted to follow different types of strategies to generate
great profits for their portfolios. These strategies show the capability and willingness of taking risk of an investor.
There are three ways by which an investor manage their portfolio i.e. active management, passive investment and
indexing. In active management the manager tries to gain arbitrage profits for its clients or themselves. While in
passive management the investor is holding the asset for a long period of time for the purpose of the capital gains.
However indexing is the combination of active and passive management strategies. After thoroughly analyzing the
Pakistani market, we have come to a conclusion that we are following the active management strategy.

The following report is divided into four broad sections. The first section explains the purpose, project
specification and the objectives of the investors. The second section is about the market analysis. We are operating
in Pakistani market so we have taken the most active markets i.e. stock and commodity market. Third section
provides the brief analysis of the stocks and commodities. The last section of this report we discusses the decisions
we have taken in this 3-month period along with their merits and demerits.

Purpose:

 The main purpose of this report is to develop the understanding of practical application of portfolio
management concepts and become familiar to the different types of domestic and international markets.
 This report provides the complete review of the investment decisions, analysis of Pakistani commodity and
capital market and feedback of the 3 month investment.

Project specifications:

This portfolio is composed on certain constraints which has eased our portfolio management yet has created
many limitations in our work. The following are the main characteristics of our portfolio:

 This portfolio is composed from the KSE – 30 index companies and most traded commodities of the world.
 The total virtual principle amount to be invested in the portfolio is 1 million Pakistani rupees.
 Portfolio is constructed for 1 quarter only i.e. march 1, 2010 – May 20, 2011
 Short sell is not allowed.
 Risk hedging is not allowed.
 Selection of the stocks and commodities is on the basis of the benchmark set by us
 Performance of the stock and commodities would be gauged on the following parameters:

Mean.
Variance.
Portfolio return.
Portfolio variance.
Covariance & Correlation Coefficient.
Sharp ratio
 Performance of the currency would guaged under the following fundementals:
Inflation
Interest rates
Political stability
Economic performance
Objectives of the investor:
As the investor we have to set certain objectives which will help us to evaluate the performance of the
portfolio. Following are the objectives that we have set after the market analysis.
 the return of individual stock and commodity should be more than the return of the risk free
security i.e. 4.65% quarterly.
 The benchmark that we have set is 6% for the equity return, 10% for the commodities and 6%
for the currencies.
 In the end of the 3 month period, the portfolio at least have an increament of 5% .
  The portfolio should be constructed on the highest expected possible rate of return and that would
be judge by the relised average rate of return.
 The portfolio having the size of 1 million should grow by 10% i.e. 10,000 at the end of the 3
month period. Therefore we have added 1.35% in the quarterly riskfree rate (14% annual) to turn
the benchmark into 6%.
 We would establish the optimal risky portfolios is the one that maximizes the reward-to-variability
ratio (sharp ratio). This ratio actually help to satisfy the investment even in risk aversion. and also
a way to track the performance of managed portfolio professionally.

Constraints of the investor:

 This portfolio is subject to the short ter investment i.e. for for three months; march 1 to may
20th ,2011.
 Derivates are completely ignored in order to hedge the portfolio.
 Investent in stocks are limited to the KSE 30 index
 Principle amount is limited to the 1 million pakistani rupees.
 We have ignored all the cost of making transactions i.e. broker commissions, tranfer of
shares fee etc.
Market analysis:

We have formulate our portfolio from three major markets i.e. commodity market, forex and stock
exchange. We have carefully chosen the elements of the portfolio that could enhance the profitability.

Many people believe that stock and bond market are the only market where the money should be invested
because stock market provides great returns while bonds provide the safe earnings. That’s why the other sectors of
the money markets are ignored on this very basis. However, our thinking and investment strategies do not
completely match with the myopic view of the money market. We are not completely against the market movers’
opinion as they are highly experienced and know their work better than us but we believe that commodity and
foreign exchange markets are also the sectors which can provide also increase our profitability.

Therefore, in order to support our investment decision we have done analysis. The summarized literature of
the analysis is discussed in stock market, commodity and forex market analysis.

Stock exchange:

Pakistani stock exchange is divided into different stock change and Karachi stock exchange is one of the
oldest and most liquidates market of the Pakistan. Out of these markets we have restricted ourselves to KSE 30
index. KSE 30 index is composed out of 30 most traded national and multi-national companies of Pakistan
established formally on 1 September 2006. It was establish to have a benchmark by which the stock price
performance can be compared. KSE index is calculated using the free float market capitalization methodology. Free
floated improves index flexibility in terms of inclusion any stock from all the listed stocks. This improves arket
coverage and stock coverage of the index. However, under the free float methodology, since only the free float
market capitalization of each company is considered for index calculation, it becomes difficult to include closely
held companies in the index while at the same time preventing their undue influence on the index movements.

KSE 30 is divided into 11 sectors from which at the present banking sector is the most earning division
with 30% of the total market earnings. As per 20th may 2011, the KSE-30 has lost 7.33 points to close at 11,540.74
points as compared with 11,548.07 points. This decrease was witnessed due to the uncertainty of the federal budget
implications on corporate sector. However, Commodity stocks remained in the limelight despite uncertainty over
disbursement of International Monetary Fund tranche of $1.7 billion." Lotte Pak PTA traded 2.53 million shares as it
closed at Rs 14.73 as compared with its opening at Rs 14.83, losing 10 paisas.

Commodity market:

Commodity market has been very much

Foreign exchange market:

 Forex market is one of the very volatile and unpredictable components of the investment market. Since all
the economic factors affect the currency of the country it is very difficult to analyze its movements. Moreover, the
correlations and the political and economic agreements of the future and future outlook of the also has their impact
on the currency movement.

Pakistan recently has been characterized under most politically unrest country of the world. Due to this
reason, Pakistani rupee has devalued against all the currencies of the world. After the killing of Osama Bin laden in
Pakistan, all the Asian currencies and stock market has witnessed an upward trend while Pakistani rupee has
devalued against major currencies of the world. However, the currency has soon recovered from that downturn but
this recovery was very short lived.

After analyzing the ten most traded currencies of the world (analysis in appendix 4) we have selected
sterling pounds.

Sterling pounds:

Pound is the national currency of United Kingdom. It is one of the oldest and fourth most traded currencies
of the world and third most held currency of the global reserve. As per may 24, pounds have endured a poor start to
trading and incur a noticeable loss against Australian dollar, Kiwi dollar, Swedish kroner and Pakistani rupee. This
movement comes despite public sector net borrowing figures coming in better than expected. It appears that the
markets are focusing on other factors such as risky nature of the pound at the present.

As the quantitative analysis shows that amongst the top traded currencies of the world, pound is most risky
currency with 0.498% standard deviation and 5.45% returns as shown by the 90 day analysis. The basis of the
selection of the currency has been the return.

Following are the macro-fundamentals against which we have analyze the currency:

Inflation:

Increasing inflation has been witnessed after the global financial crisis and governments are been trying to
control it. However, at that time, non availability of the paper money in the market has caused the markets to crash.
Consequently, the government has increased the money supply in the market which has pushed the inflation up.

As per the UK statistics, the CPI inflation was 4.5% in April which has increased by 0.5% since March.
This unexpected increase in the inflation has worried the economists in UK. Therefore, they are trying to predict the
future inflation rate and its pace by which it might increase. The main reasons of the inflation were transportation,
alcoholic and beverages and housing and house hold services.

Furthermore, the inflation of Pakistan was recorded 14.04 in April. This has increased by 0.02% since
March due to the expectation of the budget.

As we have seen that both of the countries’ inflation rates has huge gap among them. Furthermore, the gap
or low interest rate shows the rising currency value, as per its purchasing power increases relative to other
currencies. In short, pound has appreciated against the Pakistani rupee and expected to appreciate more in the future.

Interest rates:

Interest rates, inflation and exchange rate are highly correlated. The central bank manipulates interest rates
to exert the influence over both inflation and exchange rates because changing interest rates changes the inflation
and currency value. Higher interest rates attract the foreign investors to invest in your country which causes the
exchange rates to move upward. However, the impact of high interest rates causes the inflation to go further up
which influences the currency value to go down or remain unchanged.

UK’s interest rate from the past 26 months is 0.5 and expecting to remain unchanged till 2012. However,
MPC is worried about the inflation rate which has increased by 2% unexpectedly and causing the stir in the market.
So far the proposal of increasing interest rate has been denied. However, it is expected that the officials ight change
their decision and interest rates will increase by 500 bps points in future because of the fast pace increasing inflation.

The benchmark interest rate in Pakistan was last reported at 14.00 percent. In Pakistan the interest rates
decisions are taken by the State Bank of Pakistan. The official interest rate is the discount rate. From 1992 until
2010, Pakistan's average interest rate was 12.78 percent reaching an historical high of 20.00 percent in October of
1996 and a record low of 7.50 percent in November of 2002.

Both of the country’s interest rates have a huge difference between them. It is a common knowledge that
high interest rates attract the foreign investment in the country. However, Pakistani foreign reserves have declined in
28% since June-April 2010/11. The operation of bin laden on the lands of Pakistan has hurt the future prospects of
the investment. However, still UK’s economy has some faith on the Pakistani economy that’s why they have not
withdrawn their funds from the Pakistani market.

UK’s exchange rate has the element of arbitrage profit in its exchange rate. Because as per the interest rate
parity the exchange rate of March 1 2011 should be

Fwd rate= 139.662 * 1+0.005 = 122.53

1+0.14

122.53 Rs/ pound were calculated by as for the march 1 as per the interest rate parity but when the market
opened on next day the actual rate was 138.8455. According to this the arbitrage profit earned on every pound is
16.3155 RS.

Balance of payments:

As per the 4th quarter report of 2010, UK and Pakistani are both in deficit. However, UK is still in better
condition than Pakistan. Currently UK has recorded 10.5 billion pounds which was increased by 2.9 billion pounds
from the last quarter. While Pakistani government published that their account is deficit by 1.4 billion dollars. As
compare to the UK Pakistan‘s balance shows the less deficit. However, it contains a major proportion of the GDP.
Due to this reason Pakistani currency has depreciated more than pound in the foreign markets.

Gross domestic product:

High dividend yield stock is not necessarily better investments than low yield stocks. Total return to an investor
comes from both divided and capital gains or you can say appreciation in the value of the stock. Low dividend yield
firms presumably of a greater prospect for capital gains or else investor would not be willing to hold yield stock in
their portfolio. For this purpose we would look into the P/E ratio which tells us how much a stock purchaser must
pay per rupee off the earning, the firm generate for the each share.