Project 1 (Risk and Return)

You are a Fund manager and trying to make a diversified portfolio for your client after analyzing all the parameters. You have 1 million rupees for an investment, keep in mind your client behavior is classified under "Risk Averse" category. Few steps for developing a well-diversified portfolio. You are allowed to invest only 5 stocks in your client's portfolio.

1.Select at least 10 companies which are listed in the Pakistan Stock Exchange from different sectors.

2.You can select maximum two companies from each sector.You must mention reason of selection of company from each sector. Reason may be future growth forecast, dividend payout, liquidity or strong business group etc. It means you need to justify why you select a particular company.

3.Extract ONE year monthly closing prices. (Hint: Price should be last working day of the month)

Price you can start from January 2019 till June 30^th 2020 as you feel comfortable to get data.

4.Extract ONE-year months closing points of KSE-100 Index.

Index can start from January 2019 till June 30^th 2020 as you feel comfortable to get data.

5.Calculate the average return from historical prices which you extracted in step 2 and 3. Take care that return will be calculated for all companies you selected as well as KSE-100 Index.

6.Calculate the Standard deviation of historical (Monthly Closing) prices and KSE-100 index.

7.Calculate the Co-efficient of variation of each company to figure out which company is bearing lower per unit of risk.

8.Select 5 companies with the help of CV in your portfolio in order to minimize the overall portfolio risk.

9.Calculate the required return through CAPM, your risk-free rate should be KIBOR one-year rate. Beta (Using formula of Covariance of Stock, Market divide by Variance of Market), and Market return assumed to be 15%.

You can take help from this video link to calculate Beta.

https://youtu.be/JCyapYjjzUM

10.Develop a well-diversified portfolio by optimizing the weights (Percentage of investment) to attain objective of lower risk in terms of overall portfolio.

Data Sources: www.psx.com.pk, www.dps.psx.com.pk, www.scstrade.com, www.sbp.org.pk

Marking Scheme:

Marks will be in the range as described below depending on how much you are meeting project requirements.

60-67

68-73

74-80

81 plus

Group once made and then not changed/add/remove members

Three changes

Two changes

One change

No change

Selection of company meeting project criteria

Not meeting criteria

Meeting but unable to justify in writing

Meeting and justify in report

Good selection and justification

Calculation

Not presented properly

Poor presentation

Presented but lacking in appropriateness

Good presentation of project working

Beta calculation

Not presented properly

Poor presentation

Presented but lacking in explanation

Good presentation of Beta

Portfolio selection as required in Point 10 of project

Not done properly

Poor selection of companies for portfolio based on CV

Good portfolio plan

Very good portfolio making

Overall presentation of Project meeting all 10 points of Project

Not good

Good

Very good

Impressive