Respectfully yours

Letter of Transmittal

June 17th, 2015 Mohammed Tajul Islam Chief Rating Officer Credit Rating Agency of Bangladesh Ltd. (CRAB) Subject: A research paper on ‘Making an effective portfolio by using CAPM Method’ Dear Sir, I am submitting here with my report entitled ‘Making an effective portfolio by using CAPM Method.’ The main purpose of this research paper is to get a set of concepts on ‘Making an effective portfolio by using CAPM Method’. It is mainly a quantities and qualitative report completed with primary & secondary data. Though we have put our best efforts yet it is very likely that the paper may have some mistakes and omissions that are unintentional. I hope that this report will merit your approval. Respectfully yours Md. Delowar Hossain

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Table of content Abstract…………………………………………………………………3 Introduction …………………………………………………………..3 Objectives of the study……………………………………………….3 Methodology………………………………………………………….4 Literature review……………………………………………………...4 Capital asset pricing model……………………………………………5-6 Analysis Companies in the portfolio…………………………………7 Company taken in the portfolio……………………………………….8-9 Company not taken in the portfolio…………………………………...9-10 Appendix – 1……………………………………………………………10 Appendix – 2…………………………………………………………..12 Appendix – 3…………………………………………………………..13-15

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Abstract Bangladeshi Stock Market has experienced a big crash twice from its inception. In 1996, the market was crashed because of speculative bubble whereas; it was an asset bubble in the year 2011. The stock price was overvalued this time. Price was inflated about 500-700 percent compare to the face value. DGEN Index climbed at point 8918.51 on December 05, 2010 which signaled a steeper bubble. My study postulates the making effective portfolio by using CAPM modal on the capital market in Bangladesh Stock Market through various quantitative and qualitative data which are extracted from the secondary sources and primary sources. Quantitative data are gathered from the Library of Dhaka Stock Exchange and other qualitative data are collected from published research journals, newspapers, websites etc. This study gives me clear idea about the shares that I select for my portfolio.

Introduction Bangladesh is a developing country based on market economy. Capital market is the largest market for a country. It has the huge contribution in the economy for a country. But one important thing is that the development of the capital market depends on the how efficiency the economy of the country is going on. Because the systematic risk that can’t be control. In my portfolio I want to select many shares that reduce the risky. Here I use CAPM method to make the portfolio that helps to know the intrinsic value of the stock.

Objectives of the study The ultimate objective of the research is the making effective portfolio with the following identification. 1. Analyze the shares of the selected companies. 2. Find out intrinsic value. 3. Identify the overvalue and undervalue of the shares.

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Methodology Share market presumes to be the bumpy highway among the investors. From the FY2010, Bangladeshi share market had been experienced through stepper decline of DGEN Index. The condition right now is comparatively stable but the index declined almost 40% from what it stood at the beginning of 2011. To find out the critical issues of this sudden drama, we have collected secondary information from various sources. We have emphasized on quantitative and qualitative data to analyze the prevail crisis in Bangladesh stock market. All the quantitative data are extracted from Dhaka Stock Exchange website and qualitative data are collected from published research journals, newspapers, websites etc. This study is basically exploratory in nature based on qualitative analysis. We have given emphasis on few expert opinions to ensure the reliability of our study.

Literature review Stock markets were not as sophisticated and world based trading exchange as today. The Dutch East India Company was the first company who offered stocks to the outside investors. They entitled the investors a fixed percentage of company’s profit. The company was also the first company to raise stocks and bonds among the general public. With the view of stock market we see lots of research. Since I take the data on DSE a I review some research like Optimal Portfolio Construction: Evidence from Dhaka Stock Exchange in Bangladesh The main purpose of this paper is to construct an optimal portfolio by using Sharpe's singleindex model. For this purpose the monthly closing prices of 164 companies listed in Dhaka Stock Exchange (DSE) and DSE all share price index for the period of July 2007 to June 2012 have been considered. The proposed method formulates a unique cut off point (Cut off rate of return), selects stocks having excess return to beta ratio surpassing this cut off point, and determines the percentage of investment in each of selected stocks. The optimum portfolio consists of thirty three stocks selected out of 164 stocks, giving the return of 6.17%. The findings of this paper will be useful for policy makers, all kinds of investors, corporations and other financial market- participants.

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Capital asset pricing model The formula to find out the required rate of return of stock by using CAPM E(Ri) = Rf + (Rm – RF ) β The way to find out the market return 

Rm = (Ending of Month Stock Price/ Being of Month Stock Price) - 1

The way to find out the Beta 

β = Calculating by using slope equation in excel.

Here, the risk free rate is taken the rate of T-bill that is risk free interest rate. The T-bill maturity period is one year that is 7.5%.

Intrinsic Price Calculation  

P = D/E(Ri) D = Current Price * Market Return

CAPM: is a model that is used to find out the intrinsic value of the share in the capital market. Intrinsic value is the fair market value that is used to understand the market is overvalued or undervalued. If the market price is less than the intrinsic value, it is the undervalued. If the market price is more than the intrinsic value, it is the over valued Now the question why this model is called the pricing model and how is it represented? We use the pricing model to find out the intrinsic value that helps us to know the market in fair market price or not The CAPM mode is represented by the securities market line (SML) SML is a straight line that represents all the assets that are traded in the markets. In every point of SML represents the relationship between the expected rerun and beta Here beta is the systematic risk it represents how much the assets change for the changing the market condition. Since the Bata is related with market condition it is called the systematic risk. Now the question how the SML helps to find out the intrinsic value of asset? If we know the Bata, we can know the required rate of return. If we know the return, we can find out the intrinsic value.

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If the expected return is more than present return, the market is undervalued. So in future the securities price will increase in future. We know high risk and high gain. So, if the risk increases, the gain will increase. After all the risk premium that means reward will be increased. We know there are two risks for an investor.  

systematic risk firm specific risk

Now the question which one is irrelevant and which one is relevant for a firm, the firm specific risk is irrelevant risk for investors. If investor wants to eliminate the firm specific risk, investor can do it. So by which the firm can eliminate the risk. So investor is not concerned on this risk. The systematic risk is the relevant risk for a firm. So firm have to concern about it. This is the market condition risk that is related to the market. So by any fault decision the company has to suffer more. For the reasons the systematic risk is the relevant risk for a firm.

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Analysis Companies in the portfolio Here I analysis 30th companies from capital market that are AAMRA TECHNOLOGIES LIMITED; AB BANK; ACI FORMULATIONS LIMITED; ACTIVE FINE CHEMICALS LTD; ACTIVE FINE CHEMICALS LTD; ALHAJ TEXTILE MILLS LIMITED; APEX FOODS LIMITED; ANWAR GALVANIZING LIMITED; AIMS FIRST GUARANTEED MUTUAL FUND; AGRANI INSURANCE CO. LTD.; AFTAB AUTOMOBILES LIMITED; BANGAS LIMITED; BAY LEASING & INVESTMENT LIMITED; BSRM STEELS LIMITED; DESH GARMENTS LIMITED; GOLDEN SON LTD.; JUTE SPINNERS LIMITED; INTECH ONLINE LIMITED.; IDLC FINANCE LIMITED; H.R. TEXTILE MILLS LIMITED; GPH ISPAT LTD.; KEYA COSMETICS LTD.; LAFARGE SURMA CEMENT LTD.; LANKABANGLA FINANCE LTD.; LIBRA INFUSIONS LTD.; MARICO BANGLADESH LIMITED; METRO SPINNING LTD.; MJL BANGLADESH LIMITED; NAVANA CNG LIMITED; ORION INFUSION LTD.; UNITED AIRWAYS (BD) LTD; After analysis I understand which companies are undervalued and which companies are overvalued. Then I take the decision to include the companies in my portfolio. If I look the following graph I can easily understand the position of the companies. Here there are two curves. The blue curve indicates the intrinsic value and the red curve indicates the market value. I see here sometimes the intrinsic value curve cross the market value at this point the company is undervalued. And at the time when the market value cross the intrinsic value at this time the company is overvalued. If I have any shares in my hand I should sell these in the market because the price may fall at any time. Since I want to make portfolio here, I need to buy shares. So I prefer the shares which are undervalued.

Companies' Portfoliow Intensic Value 112 102 77 6762 63 37 27 2223

Current Market Price 106

77 51 37

63 55 2527 21 16

70

59 47

58 1822

6462

53 46 4643 4744

3131 1613

32 2122 21

48 40 1111

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9 10

Company taken in the portfolio I include the shares which are undervalued in the market. Among the 30th companies I can take only 16th companies which are ACTIVE FINE CHEMICALS LTD; APEX FOODS LIMITED; ANWAR GALVANIZING LIMITED.; AGRANI INSURANCE CO. LTD.; DESH GARMENTS LIMITED; GOLDEN SON LTD.; JUTE SPINNERS LIMITED; INTECH ONLINE LIMITED.; H.R. TEXTILE MILLS LIMITED; GPH ISPAT LTD.; LAFARGE SURMA CEMENT LTD.; MARICO BANGLADESH LIMITED; METRO SPINNING LTD.; NAVANA CNG LIMITED; ORION INFUSION LTD.; because these companies are undervalued. We know the company which is undervalued in future the price may increase, so I need to include the companies in my portfolio. Here there are two charts

1st Chart In the 1st chart I show the movement of the market price and the intrinsic value.

120.00 100.00 80.00 60.00 40.00 20.00 0.00

Intensic Value Current Market Price

2nd Chart 8|Page

In this chart I show how difference the intrinsic value and market value. In the bar chart I can easily understand the difference intrinsic value and market value of easy company.

Companies Taken In Portfoliow Intensic Value

Current Market Price 191

112 102 6762

112 102 51 37

51 37

118

106 70 2116

3131

5947

6462

4643 4744 1613

1111

Company not taken in the portfolio After analysis 30th companies I find 14th companies that are not capable for me to include in my portfolio because these are overvalued. The overvalued companies are traded in the market in a price that is more than fair market price. The price may fall at any time. So it may make loss for me. After all these share may not be beneficiary for me. The companies that I analysis but I do not include in my portfolio that are AAMRA TECHNOLOGIES LIMITED; AB BANK; ACI FORMULATIONS LIMITED; ACTIVE FINE CHEMICALS LTD; ALHAJ TEXTILE MILLS LIMITED;; AIMS FIRST GUARANTEED MUTUAL FUND; AFTAB AUTOMOBILES LIMITED; BANGAS LIMITED; BAY LEASING & INVESTMENT LIMITED; BSRM STEELS LIMITEDIDLC FINANCE LIMITED; KEYA COSMETICS LTDLANKABANGLA FINANCE LTD.; LIBRA INFUSIONS LTD.; MJL BANGLADESH LIMITED; UNITED AIRWAYS (BD) LTD; Here there are two charts

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4840

1st chart Here I show the movement of the current market price as well as intrinsic value. Since all the shares here are overvalued, the intrinsic curve is the down of market price curve. 300.000 250.000 200.000 150.000 100.000 Current Market Price

50.000 0.000

Intensic Value

2nd Chart Here I show the difference of market price and intrinsic value of each company. Here I clearly see how much difference between market price and intrinsic value.

Companies not take in Portfoliow Intensic Value

63 27

37

22 23

Current Market Price 77

77 55 25 27

63

58 18 22

46

53 21 22

21

32 9 10

Appendix - 1 10 | P a g e

Company that taken in the portfolio

Company Name

Active Fine Chemicals Ltd APEX FOODS LIMITED ANWAR GALVANIZING LIMITED APEX FOODS LIMITED ANWAR GALVANIZING LIMITED AGRANI INSURANCE CO. LTD. DESH GARMENTS LIMITED Golden Son Ltd. JUTE SPINNERS LIMITED INTECH ONLINE LIMITED. H.R. TEXTILE MILLS LIMITED GPH Ispat Ltd. LAFARGE SURMA CEMENT LTD. METRO SPINNING LTD. Navana CNG Limited ORION INFUSION LTD.

Required rate of return

Current Price * Market Return

Intrinsic Value

Current Market Price

Over Valued or Under Valued Under Valued Under Valued

Market Return

Beta

Risk Premium with BETA

0.14

0.86

0.06

0.13

8.60

66.69

62.20

0.14

0.83

0.06

0.13

14.13

111.85

102.20

0.14

0.44

0.03

0.10

5.11

50.94

36.95

Under Valued

Yes

0.14

0.83

0.06

0.13

14.13

111.85

102.20

Under Valued

Yes

0.14

0.44

0.03

0.10

5.11

50.94

36.95

Under Valued

Yes

0.14

0.51

0.03

0.10

2.23

21.30

16.10

Under Valued

Yes

0.14

0.31

0.02

0.09

9.68

106.24

70.00

0.14

1.00

0.07

0.14

4.31

31.14

31.20

0.14

0.60

0.04

0.11

6.50

58.63

47.00

0.14

0.61

0.04

0.11

1.82

16.29

13.15

0.14

0.86

0.06

0.13

5.99

46.43

43.30

0.14

0.90

0.06

0.13

6.12

46.55

44.30

0.14

0.22

0.02

0.09

16.25

190.79

117.55

0.14

0.93

0.06

0.13

1.47

10.99

10.60

0.14

0.93

0.06

0.13

8.54

63.93

61.80

0.14

0.67

0.05

0.12

5.52

47.54

39.90

Under Valued Under Valued Under Valued Under Valued Under Valued Under Valued Under Valued Under Valued Under Valued Under Valued

Decision

Yes Yes

Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

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Appendix - 2

Company that not taken in portfolio Required rate of return

Current Price * Market Return

Intrinsic Value

Current Market Price

Over Valued or Under Valued Over Valued over Valued

Company Name

Market Return

Beta

Risk Premium with BETA

Aamra technologies limited

0.138

1.789

0.122

0.192

5.142

26.774

37.200

AB Bank

0.138

1.080

0.074

0.144

3.207

22.316

23.200

0.138

1.413

0.096

0.166

32.552

195.659

235.500

over valued

No

0.138

1.435

0.098

0.168

10.588

63.051

76.600

over valued

No

0.138

1.200

0.082

0.152

3.760

24.758

27.200

over valued

No

0.138

1.282

0.087

0.157

8.660

54.995

62.650

over valued

No

0.138

1.101

0.075

0.145

45.974

316.821

332.600

0.138

1.430

0.098

0.168

3.096

18.476

22.400

0.138

1.683

0.115

0.185

10.650

57.620

77.050

0.138

1.316

0.090

0.160

7.340

45.931

53.100

0.138

1.103

0.075

0.145

3.069

21.124

22.200

0.138

2.001

0.137

0.207

4.396

21.281

31.800

0.138

1.262

0.086

0.156

50.978

326.553

368.800

0.138

0.618

0.042

0.112

16.007

142.736

115.800

0.138

1.201

0.082

0.152

1.313

8.643

9.500

ACI FORMULATIONS LIMITED ALHAJ TEXTILE MILLS LIMITED AIMS FIRST GUARANTEED MUTUAL FUND. AFTAB AUTOMOBILES LIMITED. BANGAS LIMITED Bay Leasing & Investment Limited BSRM Steels Limited IDLC FINANCE LIMITED KEYA COSMETICS LTD. LankaBangla Finance Ltd. LIBRA INFUSIONS LTD. MJL Bangladesh Limited United Airways (BD) Ltd.

over valued over valued over valued over valued over valued over valued over valued over valued over valued

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Decision

No No

No No No No No No No No No

Appendix - 3

All the analysis Companies in the portfolio

Required rate of return

Current Price * Market Return

Intrinsic Value

Current Market Price

Market Return

Beta

Risk Premium with BETA

aamra technologies limited

0.14

1.79

0.122

0.192

5.14

26.77

37.2

AB Bank

0.14

1.08

0.074

0.144

3.21

22.32

23.2

0.14

1.41

0.096

0.166

32.55

195.66

235.5

0.14

0.86

0.059

0.129

8.60

66.69

62.2

0.14

1.44

0.098

0.168

10.59

63.05

76.6

0.14

0.83

0.056

0.126

14.13

111.85

102.2

0.14

0.44

0.030

0.100

5.11

50.94

36.95

0.14

1.20

0.082

0.152

3.76

24.76

27.2

0.14

0.51

0.034

0.104

2.23

21.30

16.1

0.14

1.28

0.087

0.157

8.66

55.00

62.65

BANGAS LIMITED

0.14

1.10

0.075

0.145

45.97

316.82

332.6

Bay Leasing & Investment Limited

0.14

1.43

0.098

0.168

3.10

18.48

22.4

BSRM Steels Limited

0.14

1.68

0.115

0.185

10.65

57.62

77.05

DESH GARMENTS LIMITED

0.14

0.31

0.021

0.091

9.68

106.24

70

Golden Son Ltd.

0.14

1.00

0.068

0.138

4.31

31.14

31.2

JUTE SPINNERS LIMITED

0.14

0.60

0.041

0.111

6.50

58.63

47

INTECH ONLINE LIMITED.

0.14

0.61

0.042

0.112

1.82

16.29

13.15

IDLC FINANCE LIMITED

0.14

1.32

0.090

0.160

7.34

45.93

53.1

H.R. TEXTILE MILLS LIMITED

0.14

0.86

0.059

0.129

5.99

46.43

43.3

GPH Ispat Ltd.

0.14

0.90

0.062

0.132

6.12

46.55

44.3

KEYA COSMETICS LTD.

0.14

1.10

0.075

0.145

3.07

21.12

22.2

Company Name

ACI FORMULATIONS LIMITED Active Fine Chemicals Ltd ALHAJ TEXTILE MILLS LIMITED APEX FOODS LIMITED ANWAR GALVANIZING LIMITED AIMS FIRST GUARANTEED MUTUAL FUND. AGRANI INSURANCE CO. LTD. AFTAB AUTOMOBILES LIMITED.

Over Valued or Under Valued

Decisio n

Over Valued over Valued over valued Under Valued over valued Under Valued Under Valued

Yes

over valued

No

Under Valued over valued over valued over valued over valued Under Valued Under Valued Under Valued Under Valued over valued Under Valued Under Valued over valued

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No No No

No Yes Yes

Yes No No No No Yes Yes Yes Yes No Yes Yes No

LAFARGE SURMA CEMENT LTD. LankaBangla Finance Ltd.

0.14

0.22

0.015

0.085

16.25

190.79

117.55

0.14

2.00

0.137

0.207

4.40

21.28

31.8

LIBRA INFUSIONS LTD.

0.14

1.26

0.086

0.156

50.98

326.55

368.8

Marico Bangladesh Limited

0.14

0.14

0.010

0.080

173.46

2179.38

1254.9

METRO SPINNING LTD.

0.14

0.93

0.063

0.133

1.47

10.99

10.6

MJL Bangladesh Limited

0.14

0.62

0.042

0.112

16.01

142.74

115.8

Navana CNG Limited

0.14

0.93

0.064

0.134

8.54

63.93

61.8

ORION INFUSION LTD.

0.14

0.67

0.046

0.116

5.52

47.54

39.9

United Airways (BD) Ltd.

0.14

1.20

0.082

0.152

1.31

8.64

9.5

Under Valued over valued over valued Under Valued Under Valued over valued Under Valued Under Valued over valued

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Yes No No Yes Yes No Yes Yes No