GAMBY MEDICAL & BUSINESS COLLAGE DEPARTMENT

OF ACCOUNTING AND FINANCE POST GRADUATE

PROGAM

AN ASSIGNMENT ON THE ASSESSMENT OF PORTOFOLIO

MANAGMENT ON THE COURSE OF INVESTMENT
ANALYSIS AND PORTOFOLIO MANAGMENT .

NAME ID NO

1. Tilaye Alene Kebede GACC/E/113/13

Submitted to:-FirewChekole(PhD)
june 30, 2022
Bahir Dar Ethiopia
 1. Introduction to portfolio management and performance evaluation

A portfolio is a collection of programs, projects and/or operations managed as a

group. The components of a portfolio may not necessarily be interdependent or
even related but they are managed together as a group to achieve strategic
objectives. Portfolio management is the centralized management of one or more
portfolios, which includes identifying, prioritizing, authorizing, managing, and
controlling projects, programs and other related work to achieve specific strategic
business objectives.

Portfolio Management (PM) techniques are systematic ways of looking at a set of

projects or activities or even business units, in order to reach an optimum balance
between risks and returns, stability and growth, attractions and drawbacks in
general, by making the best use of usually limited resources. The motivation for a
company to have several projects at a time can be of very different nature.

Individual households as well as institutional money managers must decide

whether to usepassive or active management. Passive management is holding a
well-diversified portfolio without attempting to search out security mispricing.
Active management is attempts to achieve returns higher than commensurate with
risk by forecasting broad markets and/or by identifying mispriced securities.

Portfolio performance evaluation involves determining periodically how the

portfolio performed in terms of not only the return earned, but also the risk
experienced by the investor. For portfolio evaluation appropriate measures of
return and risk as well as relevant standards (or “benchmarks”) are needed.In
general, the market value of a portfolio at a point of time is determined by adding
the markets value of all the securities held at that particular time. The market value
of the portfolio at the end of the period is calculated in the same way, only using
end-of-period prices of the securities held in the portfolio.
1
 The return on the portfolio (rp):

[ V e −V b ]
r p=
Vb

Here: Ve - beginning value of the portfolio;

Vb - ending value of the portfolio.

The essential idea behind performance evaluation is to compare the returns which
were obtained on portfolio with the results that could be obtained if more
appropriate alternative portfolios had been chosen for the investment. Such
comparison portfolios are often referred to as benchmark portfolios. In selecting
them investor should be certain that they are relevant, feasible and known in
advance. The benchmark should reflect the objectives of the investor.

Portfolio Beta can be used as an indication of the amount of market risk that the
portfolio had during the time interval. It can be compared directly with the betas of
other portfolios.

You cannot compare the ex-post or the expected and the expected return of two
portfolios without adjusting for risk. To adjust the return for risk before
comparison of performance risk adjusted measures of performance can be used:

• Sharpe’s ratio;
• Treynor’s ratio;
• Jensen’s Alpha.

Sharpe’s Ratio

Sharpe’s ratio shows an excess a return over risk free rate, or risk premium, by
unit of total risk, measured by standard deviation:

' [řp – řf ]
Sharp e sRatio=
σp ❑

Here: řp - The average return for portfolio p during some period of time;
2
 řf - The average risk-free rate of return during the period;

σp - Standard deviation of returns for portfolio p during the period.

Treynor’s Ratio

Treynor’s ratio shows an excess actual return over risk free rate, or risk premium,
by unit of systematic risk, measured by Beta:

❑ [ ř p – řf ]
Treynor ' s Ratio =
βp ❑

Here: βp – Beta, measure of systematic risk for the portfolio p.

Measuring Diversification:

Portfolio diversification is typically measured by correlating the returns on the

portfolio
withthereturnsonthemarketindex,thisisaccomplishedaspartoftheprocessoffittinga
characteristic line whereby the portfolio's returns are regressed: against the
market's
returns.Thesquareofthecorrelationcoefficientproducedasapartoftheanalysis,called

the coefficient of determination, or R2, is used to, denote the degree of

diversification.

The coefficient of determination indicates the percentage of the variance in

the portfolio's returnsthatisexplainedbythemarket's-

returns.Ifthefundistotallydiversified,theR2will approach 1.0, indicating that the

fund's returns are completely explained by the market's returns: The lower the
coefficient of determination, the less the portfolio returns are
attributabletothemarket'sreturns.Thisindicatesthatotherfactors,whichcouldhavebee
n diversified away, are being allowed to influence-the portfolio's returns.

3
Jensen's Differential Return Measure:

Jensen‘s Alpha shows excess actual return over required return and excess of
actual risk premium over required risk premium. This measure of the portfolio
manager’s performance is based on the CAPM

Jensen ’ s Alpha=[ ř p−ř f ] – β p [ ř m – ř f ]

Here: řm - The average return on the market in period t;

[řm –řf] - The market risk premium during period t.

Comparison of Portfolio Performance Measures

It is important to note, that if a portfolio is completely diversified, all of these

measures (Sharpe, Treynor’s ratios and Jensen’s Alpha) will agree on the ranking
of the portfolios. The reason for this is that with the complete diversification total
variance (σ p) is equal to systematic variance ( β p). When portfolios are not
completely diversified, the Treynor’s and Jensen’s measures can rank relatively
undiversified portfolios much higher than the Sharpe measure does. Since the
Sharpe ratio uses total risk, both systematic and unsystematic components are
included. Practical & performance evaluation see below :-

2. The Abay Bank and operation activities

Abay Bank has fulfilled all the necessary requirements of the National Bank of
Ethiopia to set up a bank, and officially established on July 14th 2010 and started
full-fledged banking operations on November 3, 2010. Currently, the paid up-
capital of the bank is Birr 3.62 billion/ Three Billion Six Hundred Twenty Million
Birr until June, 2022, and the number of share holders reached 4,317/ Four
Thousand Three Hundred Seventeen. The Bank is poised to serve all economic
sectors through its network of branches. It extends its services to domestic trade

4
and services, international trade, agriculture, industry, transportation, construction
and real estate sectors.

Abay Bank is taking all the necessary steps to be an effective partner to every
business in fulfilling their financial dreams and aspirations. The Bank is
determined to bridge the gap between access to financial services and those who
need it most. In light of this, the Bank offers all types of universal bank in services,
and has planned to render unique services to its clients supported with modern
technology. Since its establishment, the Bank has achieved encouraging
achievements by all standards. Its sphere of operation has expanded all over the
country and the total number of branches has reached over 373 and it has more
than 1,665,160/ One Million Six Hundred Sixty Five Thousand One Hundred Sixty
account holders as of June 2022.

The banks follow and respect the national bank rules and regulations. Additionally
the bank has external and internal controlling mechanism. The bank run the
following operational activates:-
 Deposit Mobilization:-the Bank moved aggressively in expansion and
diversification of service delivery channels as well as promotion and
enhancement of customer service.
 Loans and Advances:- the bank give loan advance for the difference
lenders /investors/.
 International Banking Operations:-Strengthen International Banking
Operations in the area of foreign currency generation through different
sources and international trade facilitation.
 Promotion:- The Bank has continue undertaking promotional activities in
pursuit of strengthening its image in the eyes and hearts of the general public
and publicizing the Banks products and services.

5
  Branch Network Expansion:-the Bank expand its branch network across
the width and breadth of the country.
 Banking Technology:- Aware of the importance of informational
technology for providing efficient and effective customer service,
introducing new products/services and minimizing operating cost, the Bank
has endeavored to implement up-to-date and state of the art banking
technologies.

1. The bank Portfolio management and performance evaluation

Every organization/firm to increase the retune and reducing the risk must
construct portfolio. After constructing the portfolio mange and measure the
performance is that attractive or not and which one is adjustable or not and
comparing the expected return with the actual return According to the branch
manager said in the branch not construct the portfolio, because the branch not has
awareness how to construct, how to manage and evaluate the portfolio. But at the
head office the bank prepared one nation portfolio and manages the portfolio and
prepared the portfolio evaluation report at the end of the year. I don`t know how to
construct the portfolio, how to manage and how to measure evaluation
performance. All evidence holds in the head office and not familiar with the
branch. In the future the branch wish begin construct the portfolio by
communicating and sharing the experience from the head office.

In general to assessing the bank portfolio management performance theoretically

it`s impossible, Because in the branch the bank not construct portfolio and not
doing well. In the future the bank to achieving the objective and strategic plans
must construct the portfolio, manage and measure evaluation performance.
Because it indicates how increasing the bank return, how reducing the risk that
6
facing the bank operation by diversifications and how safety, liquidity and hedge
against various risks, how to asset expansion and capital growth. Additionally
useful todecision making , better risk management /risk minimization/,optimized
(not maximized) resource utilization by doing the right number of
project ,alignment with the strategy of the organization ,increased project delivery
success ,Faster project turnaround time ,maximized organization impact ,reduce
sunk cost ,transparency and more and better ideas. So the bank must construct
portfolio in the branch level and evaluate the management performance.