MARCH 4, 2024

POrtfolio management
Assignment 1

SYED SHAFAN HASAN RIZVI - 24203

 Table of Contents
Introduction...............................................................................................2
Data Collection and Calculations.............................................................4
Analysis....................................................................................................7
Conclusion................................................................................................8

Table of Figures
Figure 1: Sector Wise Market Capitalization............................................2
Figure 2: Covariance calculation through data analysis...........................4
Figure 3: Calculating Optimal Risky Portfolio.........................................5
Figure 4: Cal & Efficient Frontier............................................................7
Figure 5: Comparison of Risk & Returns.................................................8

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Introduction
In this assignment, 15 stocks were selected from the Pakistan Stock Exchange to construct an
optimal complete portfolio. Stocks were selected from 7 different sectors. The sectors selected
were:

1. Textile
2. Leather And Tanneries
3. Technology and Communications
4. Commercial Banks
5. Oil and Gas exportation Companies
6. Chemicals
7. Fertilizers

The rationale behind selecting these sectors from the 30+ sectors available was based on the
market capitalization value.

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 Market Cap.
Fertilizer
Oil & Gas

Chemical Textile

Commercial Banks

Leather and Tanner-

ies
Technology &
Communication

Figure 1: Sector Wise Market Capitalization

As depicted in the pie chart, these sectors are diversified in the sense that some are large, some
are medium, and some are small. Thus, providing good market coverage.

And the stocks selected from each sector follow the same rationale as well. I selected stocks
mostly based on market cap in each sector. And some stocks based on personal preference.

The stocks selected from each sector are:

1. Textile:
a. GUL AHMED
b. NISHAT MILLS
c. FAZAL SPINNING
2. Leather And Tanneries
a. BATA
b. SERVICE INDUSTRIES LTD.
3. Technology and Communications

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 a. HUM NETWORK
b. NETSOL
c. PTCL
4. Commercial Banks
a. MEEZAN BANK
b. BANK ISLAMI PAKISTAN LIMITED
c. NATIONAL BANK OF PAKISTAN
5. Oil and Gas exportation Companies
a. OIL AND GAS DEVELOPMENT CO LTD (OGDC)

6. Chemicals
a. AGRITECH LTD (AGL)
b. COLGATE PALMOLIVE PAKISTAN (COLG)

7. Fertilizers
a. FAUJI FERTILIZER COMPANY LIMITED

I also calculated the returns of the KSE100 Index for the last 5 years and it’s average for
comparison purposes.

Data Collection and Calculations

After selecting the stocks, stock price data for the last 5 years (Jan 2019 to Jan 2024) was
downloaded from this website. The data was then put into an excel sheet for further calculations.
Returns were already calculated in the data, but we could manually collect it as well using the
formula [ (closing price –
opening price) / opening price].
After calculating returns, I
calculated average returns,

Figure 2: Covariance calculation through data analysis

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variance & standard deviation of each stock. After that I calculated the covariance matrix using
excel data analysis add-in.

The input range was all the returns of the stock and output was generated in a separate sheet, to
fill in the duplicate values in the covariance matrix I used the transpose function.

Equally weighted, Minimum Variance & Optimal Risky Portfolio

Once that was done, I constructed the equally weighted portfolio. The expected return was
calculated using the MMULT function which excel uses to multiply matrices. Risk free rate was
taken from the 3-month Tbill Rate

Standard deviation was also calculated through combination of MMULT and transpose. The
formulas and calculations can be checked in the excel sheet.

To calculate the
minimum variance
portfolio, I used
solver add-in. The
target cell was
standard deviation,
which was set to
min, the variable
cells that were
changed were the
weights of the stocks
and the constraint
was the total weight
of the stocks to be
equal to 1. And
similar approach was

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Figure 3: Calculating Optimal Risky Portfolio
used to calculate the optimal risky portfolio, whereby I maximized the Sharpe ratio by changing
the weights of the stocks subject to the constraint that total of the weights must be equal to 1. The
formula for calculating the Sharpe ratio was [ (expected return – risk free rate) / Standard
Deviation]

Optimal Complete Portfolio

To calculate the optimal complete portfolio, I used a risk aversion level of 2. Then to calculate
the risky asset proportion, the following
formula was used. And the risk-free
portion was (1 - the risky asset portion.)
Expected return was the sum of weighted
returns for the optimal risky portfolio and
risk free 3-month t bill rate. Standard
deviation was simply the risky asset
weight into the standard deviation of the
optimal risky portfolio, as the risk-free asset has no risk.

I also calculated utility through the following formula:

Capital Allocation Line, Indifference Curve and Efficient Frontier

To plot the CAL, I choose optimal Risky portfolio weights and increased them by 0.1. then
complete portfolio Expected return and Standard Deviation was calculated using the formulas
described above. (the weighted sum of returns) and (risky portfolio weight into Risky Portfolio
Standard Deviation).

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For the Indifference curve I randomly chose Standard Deviations and calculated the Expected
return by rearranging the utility formula. Then plotted it on the same graph.

And for the efficient Frontier, I used Excel

solver again, whereby I chose to minimize the
standard deviation by changing the weights of
the portfolio, but this time there were two
constraints, 1) the sum of the weights needed
to be equal to 1. 2) the expected return was
what I specified. I calculated multiple SDs,
and ERs using this trick to get multiple
coordinates and finally plotted the curve.

Analysis
Different portfolios were constructed throughout this assignment, each one of them suits the risk
return preferences of investors with different perspectives. For example, if an investor undertakes
the naïve approach and builds a portfolio with equal weights in all stocks, which would allow
him to earn more return than the KSE100 Index. The return for the equally weighted portfolio is
16.73% compared to 12.84% of KSE100 Index. And the standard deviation is 27.68% compared
to 23.43% for KSE100 Index. But as we can see, the risk also increases with returns. That is
because this investor has not optimized his portfolio yet. On the other hand, we have an investor
who wants the safest portfolio with preference towards consistency, so he could create a portfolio
with minimum variance. The individual weights for each stock were calculated by Excel and
provided a standard deviation of just 13.96%. However, this also means that this investor earns
only 7.53% of his portfolio. Next, we look for a smart investor who maximizes his Sharpe ratio,
which allows him to earn a return of 38.71% while having SD of 46.6%. He can now combine
this optimal risky portfolio with a risk-free asset to mitigate his risk even further while earning
decent returns. So, we use a risk aversion level of 2 and construct the optimal complete portfolio,
which gives us return of 28.31% with a standard deviation of just 18.55% which is less than the
KSE100 Index and earns more returns. We can see this data graphically as well.

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 We can see that the Capital
CAL & Efficient Frontier Allocation line provides us
Capital Allocation Line Efficient frontier with a basic return of 21% if
Indifference Curve
we invest all our budget in
45.0%
40.0%
risk-free assets. Our
35.0% Indifference curve is tangent
30.0%
with the CAL at the optimal
25.0%
20.0% complete portfolio point. And
15.0% the risky efficient frontier is
10.0%
5.0%
tangent to the CAL at the
0.0% point where sharp ratio is
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
Figure 4: Cal & Efficient Frontier maximized.

This clustered chart

Comparision of Risk & Returns helps explain the data
KSE100 clearly, the only
portfolio that earns
Optimal Complete Portfolio
more with reduced
Optimal Risky Portfolio
risk is the optimal
Minimum Variance Portfolio complete portfolio.

Equally Weighted Portfolio

0.00% 10.00% 20.00% 30.00% 40.00% 50.00%

Expected Risk Expected Return

Figure 5: Comparison of Risk & Returns

Conclusion
Equally weighted portfolios offer a straightforward way to diversify, giving exposure to each
stock equally suitable for broad market exposure.

Minimum variance portfolios prioritize risk management by minimizing overall volatility, ideal
for risk-averse investors or those focused on capital preservation.

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Optimal risky portfolios optimize the risk-return trade-off, maximizing returns for a given risk
level or minimizing risk for a desired return, showing the benefits of diversification.

Optimal complete portfolios combine risky assets with a risk-free asset, allowing investors to
fine-tune portfolios based on their risk preferences, achieving a balanced approach between risk
and return.

The importance of diversification, risk management, and modern portfolio theory in constructing
well-suited investment portfolios tailored to individual goals in the stock market is reflected in
this report.

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