Submitted by: Rana Wasif Mahmood

ROLL NO: BCOM-1806-19

COURSE WORK: Portfolio Management Project
Government College University, Lahore
Portfolio Management Project
Portfolio Management:
The investment management also referred to as the portfolio management, is a complex process
or activity that may be divided into the five broad phases:
 Specification of the investment objectives and constraints
 Choice of asset mix
 Formulation of the portfolio strategy
 Selection of securities
 Portfolio execution
 Portfolio revision
 Performance evaluation

Phase 1:
Investment Objectives and Constraints:
The first step in the portfolio management process is to specify the investment policy which
summarizes the objectives, constraints, and preferences of the investor. The investment policy
may be expressed as follows:
Objectives:
 Return requirements
 Risk tolerance
Constraints and Preferences:
 Liquidity
 Investment horizon
 Taxes
 Regulations
 Unique circumstances

Objectives: As I am investing PKR 5 million, so the investment goals are,

 Income: To provide a steady stream of income through regular interest and dividend
payment
 Growth: To increase the value of principle amount through capital appreciation
 Stability: To protect the principle amount invested from the risk of loss
Since Income and growth represent two ways by which return is generated and stability implies
containment or even elimination of risk, investment objectives may be expressed more succinctly
in terms of return and risk, as an investor one should primarily be interested in a higher return (in
form of income or capital appreciation) and a lower level of risk in order to earn a higher return.
However how much risk one should be willing to bear depends on the risk disposition. The
investment objective should state the preference of return relative to the distaste for risk.
The investment objective can be specified in the following ways;
 Maximize the expected rate of the return, subject to the risk exposure being held within the
certain limit.
 Minimize the risk exposure, without sacrificing the certain expected rate of return
Risk Assessment:
The first and foremost step is to determine that how much risk one can bear and afford to lose
instead of the money to earn. The risk depends on the two key factors (a) financial situation of
the investor (b) temperament of the investor. In order to understand the financial situation it is
necessary to observe that what is your position wealth, major expenses (house construction,
marriage, education, medical treatment etc) After the assessment of financial situation, asses
your temperament to bear loss. Even though your financial situation permit you to absorb small
losses, you will still become upset by the small losses, so it is necessary to understand the
financial temperament as objectively as you can.

Constraints:
In persuing the investment objective, which is specified in terms of return requirement and risk
tolerance, you should bear in mind the constraints out of or relating to the following factors:
 Liquidity:
Liquidity refers to the speed with which an asset could be sold, without suffering any significant
discount to its fair market price. For example money market instruments are the most liquid
assets, whereas antiques are the least liquid. Taking into account your cash requirements in the
foreseeable you must establish the minimum level of cash you want to invest in your portfolio.
 Taxes:
What matters mostly is the post-tax return from the investment. Tax considerations therefore
have an important bearing on investment decisions. So carefully view the tax shelters available
to you and incorporate same in the investment decisions.
 Regulations:
While individual investors are generally not constrained much by law, institutional investors
have to conform to various regulations.
 Unique Circumstances:
Almost every investor faces unique circumstances. For example, an individual may have the
responsibility of looking after ageing parents. Or, an endowment fund may be precluded from
investing in the securities of companies making alcoholic products and tobacco products.
Phase 2:
Investment Opportunities in Pakistan:
With Pakistan’s economy currently struggling through a bout of high inflation, there has been an
intensified focus on diversifying one’s investments to mitigate the impact. In spite of common
belief, large capital is not a prerequisite to being a successful investor; one can build a solid
portfolio with just a small investment as well.

Short-Term vs. Long-Term Investment Opportunities in Pakistan

Understanding the different factors involved in both short-term and long-term investment plans
in Pakistan can help you decide the right option for yourself.

Short-term investments come with minimal to no risk; you would not lose any amount of your
principal. They are usually highly liquid, so you have full access to your money whenever you
may need it. However, the safety of such investments comes at a cost. They come with lower
returns than those from investments associated with a higher level of risk. The choices for
investment options are also limited, for instance, you would not be able to buy stocks as they are
riskier assets.

In addition, it is important to note that inflation can erode the purchasing power of the money
stashed in low-risk investments over time – thus, only making them suitable for the short term.

In contrast, higher-risk investments offer the potential for much higher long-term returns.
However, it is important to consider that you may incur a small loss at some point in such
investments. If the aim is to protect your capital and maintain a steady flow of income, short-
term investments are the more appropriate option. If you are looking for growth opportunities,
high-risk investments can bring in more attractive returns.

Following are some investment opportunities in Pakistan

Real Estate:
For an option for high-return investment in Pakistan, real estate is one of the most popular and
widely-used opportunities. People buy property, especially land, and leave it unattended for a
period of time. Over the years, the price of real estate appreciates. It can then be resold when it
commands a much higher price.
Keep a track of the market prices and sell the property when the prices are at their peak. There
are many real estate blogs and real estate books out there that can update you about real estate
trends, construction costs, tips and tricks, plot size conversion, and much more.
The biggest advantage of real estate investment in Pakistan is that it is a safe investment option.
You get total ownership of the property and, most importantly, the land is an asset where the
price always increases. There are also many construction companies developing real estate
projects in Pakistan, in which you can invest. Some of these include Mall of Arabia, Amazon
Outlet Mall, Florence Galleria, and IMARAT Residences, all of which provide secure
investments with excellent returns.
If you cannot afford real estate on your own, you can even buy a property in installments through
loans or a partnership with other people. However, one drawback of this investment is that it may
take time to gain returns. So, if you are looking for a short-term investment, this option may not
be feasible for you.

Stocks:

Stocks rank high among good investment opportunities in Pakistan. The Pakistani stock market
recently claimed its highest profits in 10 years at an aggregate amount of Rs. 258 billion.

However, again, like peer-to-peer lending, stocks are risky. But, it is also seen that investment in
stocks always go great. You have to be well aware and strategic about your choice of stocks. Try
building a wider portfolio of stocks to reduce the overall risk.

Usually, the pricier stocks have a higher risk attached to them but they also yield high ROI. If
you do not have any prior knowledge about the stock market, try hiring a broker.

Bond:
Treasury bonds are a safe investment option with a fixed rate of interest that is paid in phases
until the bond’s maturity. The steady returns can help offset the unpredictability of equity prices.
The Government of Pakistan issues treasury bonds starting from merely Rs. 100, with a current
yield of 13.257%. You win cash prizes of thousands of rupees. You can also use bonds as a
substitute for cash. Student bonds are one of the safest and easiest investment ideas for students
in Pakistan.

Since bonds are guaranteed by the government, there are very low chances for any inefficiencies
or risks in the payouts.

Term deposits:

A term deposit is a fixed-term investment that includes the deposits of money into an account at
a financial institution. Term deposit investments usually carry short-term maturities ranging
from one month to a few years and will have varying levels of required minimum deposits.

The investor must understand when buying a term deposit that they can withdraw their funds
only after the term ends. In some cases, the account holder may allow the investor early
termination or withdrawal if they give several days notification. Also, there will be a penalty
assessed for early termination.

Examples of term deposits include certificates of deposit (CDs) and time deposits.
 Commodities:

Commodity funds invest in raw materials or primary agricultural products, known as

commodities. These funds invest in precious metals, such as gold and silver, energy resources,
such as oil and natural gas, and agricultural goods, such as wheat. Commodity funds may also
invest in the companies that produce these commodities.

Advantages:

 Portfolio diversification. Historically, commodity funds have had low correlation with stock
market movements, which makes them a valuable source of diversification in a portfolio.
 Protection against inflation. Commodity prices tend to rise with inflation, making
commodities one of the few assets that benefits from inflation.
 Potential financial growth. Commodity prices rise and fall in tandem with supply and
demand. The more a commodity is in demand, the higher its price will rise, delivering higher
profits to the investor.

Phase 3:
Formulation of Investment strategy:
The investment is followed by opting either the active strategy or passive strategy,

 Passive strategy:

Passive investors have a buy-and-hold mentality that focuses on benefitting from the overall
increase in market prices over time. One of the major benefits of passive investing is that it
minimizes the mistakes investors can make when they react emotionally to every move of the
stock market.

Advantages:

 Easy to understand. The strategy is simple — track the index.

 Low cost. A buy-and-hold strategy minimizes transaction costs. Since the index makes all the
decisions on which companies to include, you don’t pay for — or benefit from — expert
individual stock analysis.
 Long-term growth. Over time, these indices have historically increased in value.

 Active strategy:
An active investment strategy involves using the information acquired by expert stock analysts to
actively buy and sell stocks with specific characteristics. The goal is to beat the results of the
indices and general stock market with higher returns and/or lower risk.

Advantage

 A chance at bigger rewards. An actively managed fund or portfolio has the potential to beat
index returns. A quality investment strategy can be an important factor in capturing greater
risk-adjusted returns relative to the market.
 Flexibility. Active managers can buy stocks that may be undervalued and underappreciated
in the general market. They can quickly divest themselves of underperforming stocks when
the risks become too high. They can choose not to invest during certain periods and wait for
good opportunities to buy.
 Tax management. Although frequent buying and selling may trigger more capital gains and
taxes, some strategies can help offset taxes for big winners.

My Investment Strategy to invest PKR 5 million:

I will opt the passive strategy to invest in Stocks as Passive investors have a buy-and-hold
mentality that focuses on benefitting from the overall increase in market prices over time. One of
the major benefits of passive investing is that it minimizes the mistakes investors can make when
they react emotionally to every move of the stock market. Passive investing can even make a
compelling case for better fee- and tax-adjusted returns when compared to many active equity
strategies.

Investment in Stock market:

As the money I will invest is savings and will not need for a few years so I should
consider investing in stock since it has the potential of earning the highest returns. Waiting to
invest that money is more likely to have a negative impact on an investor's returns than a positive
one. An added advantage of investing in Pakistan Stock Exchange as compared to depositing
money in banks is that an investor has a chance to earn more from investing in stocks with the
same amount of risk. The process of investing in stocks is also quite transparent.

Benefits of investment in Stocks:

Pakistan stock exchange, also known as PSX, is a trading market of shares. Many investors have
invested their huge capital in it and trade to earn a profit. They keep on buying and selling shares
of different listed companies as per the trend in the market.

1. Longterm investment
The long term investment provides a significant profit ratio in the stock market. The long term
investment is very beneficial as it gives the time frame to the investor. The investor sells his
stocks at the time of the best profit. The profit value is in the investor's hand.
2. Safe investment
It has a low risk of money stolen. The investment of a person is safe. It provides the account to
account money transfer facility. So we can say that it gives a secure way of transactions.
3. Annual dividends
Dividends play a significant role in the business. At the end of the financial year, the brokerage
company distributes the profit amount to all the shareholders. The profit amount of dividends
depends upon the amount of the shares. The investors having more shares in the company will
have a large number of dividends.
4. Time free investment
It is a time free investment as it does not bound the investor. It provides two opportunities short
term and long term. The investor selects one term according to his requirement.
5. Short term business
It is a quick business. The investor buys the stock and sells it when it receives a high-profit
value. Most of the stock exchange businesses are done daily and are termed as short term
business. They provide the daily profit or loss of the business.
6. Investment diversification
Some shareholders have an investment in various fields like entertainment, hotels, restaurants,
and many other areas. This way, the investor diversifies the risk of loss, which means that there
will be a minimal loss if one of the investment sectors does not perform well at PSX.
7. Advantage of market movement
The investor has the advantage of market ups and downs. An investor can sell his stock at the
time of maximum profit. The stock market did not bound the investor. An investor can drive the
business in his way in the market according to his requirement. Experience is the key to
successful investment in the stock exchange market.
8. Facilitation of brokerage firm
The stock exchange market gives a handsome amount of profit, but, sometimes, it is riskier to
invest in the stock market. Practice makes the man perfect. Choose the brokerage company that
invests your amount in a positive and tricky way. This way, your risk of investment will lower
down. But remember, do not go for the big investments at the start of your business.
The brokerage companies are essential for the stock exchange business. These companies are
beneficial for the investors that do not have much time for the business. They provide all the
facilities to the investors. The investor pays the brokerage companies the interest value. The
brokerage companies return the profit value to the investor.
9. Builds patience
The stock market builds patience in investors. Wait for a long time for the good demand for your
stock. If your investment is not diversified, then the investor can lose his investment in the
market. Show patience when you invest in the stock exchange market.
10. Tax benefits
The stock exchange market provides tax benefits to investors. The tax benefits are good for the
business. The investor can save a handsome amount in terms of taxes.
11. Division of loss
The investor can start his business with the brokerage companies that have the benefit of the
dividend. In the case of loss, the entire amount of loss is divided among the shareholders. The
amount of loss is not paid by one investor. It reduces the weightage of the loss.
12. High returns
According to a survey, the stock exchange market returns 10% of the investment annually. It is
very beneficial that the return percentage is good and attracts investors.
13. Online business
The stock exchange market provides the facility of online business. The buying of the stock is
relatively easy in an online process. The online process does not need to visit the companies
physically. In online visits, several companies can be visited in one day. The online business
saves time and money. It fastens the business and supports investors.

Phase 4:
Selection of Securities:
As I am investing in stocks so I collected historical data about different companies from website
of Pakistan Stock Exchange, and selected two securities in which I will invest PKR 5 million
taking into consideration the risk and return.
I decided to invest in companies of KSI 100 market index
Security A:
Cnergyco Pk limited
Cnergyico Pk Limited was incorporated in Pakistan as a public limited company on 09 January
1995 under the repealed Companies Ordinance, 1984. The Company currently operates two
business segments namely Oil Refinery Business and Petroleum Marketing Business. Petroleum
Marketing Business was formally launched in 2007. It has fair annual return and profit margin so
I decided to invest in it.
Security B
KEL Pk limited
K-Electric Limited was incorporated as a limited liability company on 13 September 1913 under
the repealed Indian Companies Act, 1882. The Company is principally engaged in the
generation, transmission and distribution of electric energy to industrial and other consumers
under the Electricity. I decided to invest in this security as I found that it will give maximum
return and less risk by taking into account the historical data.

Phase 5:
Execution of the Portfolio:
I executed the portfolio in order to determine whether it is a safe step of investment so I collected
the historical data of selected securities from Pakistan Stock exchange PSX. I decided to invest
60% in security A and 40% in security B and measure the rate of return of both securities on
Excel. I assumed to buy both securities on Nov 1, 2022 and sail on Nov 22, 22, and determine
the return of both securities by the given formula
𝐄𝐧𝐝𝐢𝐧𝐠 𝐯𝐚𝐥𝐮𝐞−𝐩𝐫𝐞𝐯𝐢𝐨𝐮𝐬 𝐯𝐚𝐥𝐮𝐞
Rate of Return = × 𝟏𝟎𝟎
𝐩𝐫𝐞𝐯𝐢𝐨𝐮𝐬 𝐯𝐚𝐥𝐮𝐞

The return of security A was determined to be 3.2% and return of security B was determined to
be 1.4%.
Return of Portfolio:
The return of the Portfolio is than determined by the following formula:
Average rate of return = W1R1 +W2R2
Where, W1 and W2 are the weight of investment in both securities respectively and R1 and R2
are the returns of both the securities.
The average rate of return of portfolio determined is 2.48%, as depicted in Excel file.
Risk of Portfolio:
The portfolio risk is also measured by taking the standard deviation of variance of actual returns
of that portfolio over time. The variability of returns is proportional to the portfolio risk. The risk
can be measured by taking the standard deviation of this variability.
The variance of portfolio is determined by formula

 Portfolio variance = w12σ12 + w22σ22 + 2w1w2Cov1,2

Where:

 w1 = the portfolio weight of the first asset

  w2 = the portfolio weight of the second asset
 σ1= the standard deviation of the first asset
 σ2 = the standard deviation of the second asset
 Cov1,2 = the covariance of the two assets, which can thus be expressed as p(1,2)σ1σ2,
where p(1,2) is the correlation coefficient between the two assets

The standard deviation is determined by taking square root of variance of the portfolio.

Phase 6:
Revision of the portfolio:

The process of addition of more assets in an existing portfolio or changing the ratio of
funds invested is called as portfolio revision. The sale and purchase of assets in an existing
portfolio over a certain period of time to maximize returns and minimize risk is called as
Portfolio revision.
So I decided to replace the security B from the portfolio after 30days as it had low return, and
added two more securities C and D ie, QUET Pk limited and AGIC Pk limited respectively,
by examining the historical data. The calculation of the average rate of return and the risk
determine that the security C has the higher return and greater risk than the security D and vice
versa.
The return of my portfolio is increased from 2.48% to 4.68% by revision of the portfolio
calculated in the Excel file.

Phase 7:
Evaluation of the Portfolio:
Sharp Ratio
The Sharpe Ratio is defined as the portfolio risk premium divided by the portfolio risk.
𝑹𝒑−𝑹𝒇
Sharpe ratio=
𝝈𝒑
The Sharpe ratio, or reward-to-variability ratio, is the slope of the capital allocation line (CAL).
The greater the slope (higher number) the better the asset. Note that the risk being used is the
total risk of the portfolio, not its systematic risk which is a limitation of the measure. The
portfolio with the highest Sharpe ratio has the best performance but the Sharpe ratio by itself is
not informative. In order to rank portfolios, the Sharpe ratio for each portfolio must be computed.
Further limitation occurs when the numerators are negative. In this instance, the Sharpe ratio will
be less negative for a riskier portfolio resulting in incorrect rankings.
In my Portfolio the Security A CNERGY, has the highest sharp ratio of 7.105%, so it has the
best performance.

Treynor Ratio
The Treynor ratio is an extension of the Sharpe ratio. Instead of using total risk, Treynor uses
beta or systematic risk in the denominator.
𝑹𝒑−𝑹𝒇
Treynor ratio =
𝜷𝒑

As with the Sharpe ratio, the Treynor ratio requires positive numerators to give meaningful
comparative results. Apart from this, the Treynor ratio does not work for negative beta assets.
Also, while both the Sharpe and Treynor ratios can rank portfolios, they do not provide
information on whether the portfolios are better than the market portfolio. Similarly, they do not
offer information about the degree of superiority of a higher ratio portfolio over a lower ratio
portfolio.

M-Squared (M²) Ratio

The concept behind the M² ratio is to create a portfolio P’ that mimics the risk of the market
portfolio by altering the weights of the actual portfolio P and the risk-free asset until portfolio P’
has the same total risk as the market. The return on the mimicking portfolio P’ is determined and
compared with the market return.
The weight in portfolio P (wp) which sets the portfolio risk equal to the market risk can be
written as
𝝈𝒎
𝝎𝒑 =
𝝈𝒑
A portfolio that matches the return of the market will have an M² value equal to zero while a
portfolio that outperforms will have a positive value. By using the M² measure, it is possible to
rank portfolios and also to determine which portfolios beat the market on a risk-adjusted basis.

Jensen’s Alpha
Jensen’s alpha is based on systematic risk. The daily returns of the portfolio are regressed against
the daily returns of the market. Essentially, this is done in order to compute a measure of this
systematic risk in the same manner as the CAPM. The difference between the actual return of the
portfolio and the calculated or modeled risk-adjusted return is a gauge of performance relative to
the market.
Jenson’s alpha = ∝ 𝒑 = 𝑹𝒑 − [𝑹𝒇 + 𝜷𝒑(𝑹𝒎 − 𝑹𝒇)
If αp is positive, the portfolio has outperformed the market while a negative value indicates
underperformance. The values of alpha can also be used to rank portfolios or the managers of
those portfolios with the alpha being a representation of the maximum amount an investor should
pay for the active management of that portfolio.
By observation of my portfolio, three of the selected securities have positive value of Jensons
alpha so they are performing well relative to the market.