portfolio management
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DIVERSIFICATION OF
PORTFOLIO MANAGEMENT [Type the document subtitle]
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ACKNOWLEDGMENT
I am thank full to my supervisor…….., who encouraged me and guided me throughout the final stages of
the completion of this dissertation. His help and support enabled me to understand the subject under
discussion.
I am also thankful to my family and friends for supporting me. Their support has pursued me to get this
degree. Without their support and confidence in me, I would not have completed the degree.
Finally, I offer my regards to all those who supported me during the final completion of the project.
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0.0. ABSTRACT
This research is based on the actual scenario to understand the portfolio management behavior of
individual investors by the way of efficient diversification methods. In this project Researcher
tried to explain the importance of diversification of investment instead of single investment.
Then the results which suffered by an investor is studied. Researcher collected data by obtaining
direct responses from brokers, mutual fund managers, some investors, and some internet sources.
First Researcher collected data with the preliminary interviews with some brokers. After
collecting the information from brokers, Researcher use the official Websites to collect the
desired information like market indexes, stock‟s historical prices and some other data. Different
types of financial formulas used by us i.e Beta calculations, CAPM calculation, intrinsic values
and dividend growth etc. The software packages used Spread sheet to analyze the data. After
getting all the data and make some analysis, Researcher found that how much diversification is
more profitable than fixed income securities.
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CONTENTS
DIVERSIFICATION OF RISK RELATED TO PORTFOLIO MANAGEMENT ..Error! Bookmark
not defined.
0.0. ABSTRACT ...................................................................................................................................... 2
1.0. AN INTRODUCTION:..................................................................................................................... 8
1.1. DIVERSIFICATION: ................................................................................................................... 8
1.2. PORTFOLIO THEORY: .............................................................................................................. 8
1.3. UNDERSTANDING RISK AND TYPES OF RISK ................................................................... 8
1.4. MARKET RISK ............................................................................................................................ 9
1.5. UNIQUE RISK ............................................................................................................................. 9
1.6. SIGNIFICANCE OF DIVERSIFICATION: .............................................................................. 10
1.7. RESEARCH QUESTIONS: ....................................................................................................... 10
1.7.1. HOW TO DO DIVERSIFICATION:...................................................................................... 10
1.7.2. HOW MANY STOCKS IN PORTFOLIO? ........................................................................ 11
1.7.3. DOES DIVERSIFICATION HELP? EXAMPLE: ............................................................. 11
1.7.4. CAUTION: HOW MUCH DIVERSIFICATION IS FEASIBLE? ..................................... 11
1.8. HYPOTHESIS: ........................................................................................................................... 11
1.9. OBJECTIVES: ............................................................................................................................ 12
2.0. LITERATURE REVIEW ............................................................................................................... 14
3.0. METHODOLOGY: ........................................................................................................................ 23
4.0. FINDINGS & RESULTS:- ............................................................................................................. 28
4.1. FUNDAMENTAL REVIEW:..................................................................................................... 28
4.2. FUNDAMENTAL WATCH: ..................................................................................................... 28
4.3. TECHNICAL ANALYSIS:- ....................................................................................................... 29
4.4. CREATION OF PORTFOLIO:- ................................................................................................. 30
4.5. THE STOCKS IN WHICH RESEARCHER INVESTED:- ....................................................... 31
5.0. ANALYSIS & DISCUSSION:- ...................................................................................................... 34
REASONING FOR THE INVESTMENT IN FOLLOWING SECTORS:- ........................................... 34
5.1. BANKING SECTOR .................................................................................................................. 34
5.1.1. NATIONAL BANK OF PAKISTAN: .................................................................................... 34
5.1.2. MUSLIM COMMERCIAL BANK: ....................................................................................... 35
5.2. ELECTRICITY SECTOR........................................................................................................... 35
5.2.1. HUB POWER COMPANY: ............................................................................................... 35
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5.2.2. KOT ADDU POWER COMPANY: ................................................................................... 36
5.2.3. NISHAT POWER LIMITED: ............................................................................................ 36
5.3. OIL & GAS SECTOR ................................................................................................................ 37
5.3.1. ATTOCK REFINERY: ....................................................................................................... 37
5.3.2. SHELL PAKISTAN: .......................................................................................................... 37
5.3.3. PAK PETROLEUM:........................................................................................................... 37
5.4. CHEMICAL SECTOR ............................................................................................................... 38
5.4.1. DESCON CHEMICALS: ................................................................................................... 38
5.4.2. ENGRO POLYMER: .......................................................................................................... 38
5.5. FERTILIZER SECTOR .............................................................................................................. 39
5.5.1. FATIMA FERTILIZER: ..................................................................................................... 39
5.5.2. FAUJI FERTILIZER: ......................................................................................................... 39
5.5.3. FAUJI FERTILIZER BIN QASIM: ................................................................................... 40
5.6. CEMENT SECTOR .................................................................................................................... 40
5.6.1. FAUJI CEMENT: ............................................................................................................... 40
5.6.2. LUCKY CEMENT: ............................................................................................................ 40
5.6.3. D.G KHAN CEMENT: ....................................................................................................... 41
5.7. AUTOMOBILE SECTOR .......................................................................................................... 41
5.7.1. PAK SUZUKI: .................................................................................................................... 42
5.7.2. INDUS MOTOR: ................................................................................................................ 42
5.8. INSURANCE SECTOR ............................................................................................................. 43
5.8.1. ADAMJEE INSURANCE: ................................................................................................. 43
5.8.2. PAKISTAN REINSURANCE: ........................................................................................... 43
5.8.3. PREMIER INSURANCE: .................................................................................................. 44
5.9. SUMMARY ................................................................................................................................ 44
5.9.1. ABOUT PURCHASE: ........................................................................................................ 44
5.9.2. ABOUT SALE: ................................................................................................................... 45
5.9.3. CONCLUSION ................................................................................................................... 45
5.10. MUTUAL FUNDS ................................................................................................................. 45
OVERVIEW OF MUTUAL FUNDS ................................................................................................. 45
5.10.1. ECONOMIC ANALYSIS: ................................................................................................. 45
5.10.2. MUTUAL FUND INDUSTRY .......................................................................................... 46
SOME FACTS FOR THE GROWTH OF MUTUAL FUNDS IN PAKISTAN ................................ 46
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5.10.3. THE STATISTICS OF THE INDUSTRY GROWTH ....................................................... 46
5.11. CLOSE ENDED FUNDS ................................................................................................... 47
5.11.1. FIRST CAPITAL MARKET FUND: ................................................................................. 47
5.11.2. AKD GOLDEN FUNDS: ................................................................................................... 48
5.11.3. ASIAN STOCK FUND LIMITED: .................................................................................... 48
5.12. OPEN ENDED FUNDS .......................................................................................................... 49
5.12.1. JS KSE 30 INDEX FUND: ................................................................................................. 49
5.12.2. JS ISLAMIC FUND: .......................................................................................................... 49
5.12.3. AKD INDEX TRACKER FUND: ...................................................................................... 49
5.13. SUMMARY ............................................................................................................................ 50
5.13.1. ABOUT PURCHASE: ........................................................................................................ 50
5.13.2. ABOUT SALE: ................................................................................................................... 51
5.13.3. CONCLUSION ................................................................................................................... 51
5.14. DAILY TRADING OF STOCKS ........................................................................................... 51
DATA ANALYSIS ................................................................................................................................. 51
6.0. CONCLUSION ............................................................................................................................... 54
6.1. JUSTIFICATION TO PROVE ALL? ......................................................................................... 54
7.0. BIBLIOGRAPHY: .......................................................................................................................... 58
8.0. ANNEXURES ................................................................................................................................ 62
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Chapter 1
INTRODUCTION
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1.0. An Introduction:
1.1. Diversification:
It is said “All the eggs should not be placed in Researcher basket”. The meaning of this quotation is that if
basket full of eggs falls, all eggs will be broken. The same case is with the diversification. Diversification
is the method in which Researcher can minimize the risk of your investment by investing in a different
kind of asset classes. In the diversification procedure, an investor invests in different categories of sectors,
So still if Researcher sector fails to generate expected profit that the investor has understood the impact
can be removed from it or bargain by gains of investments in other category of assets. It is just similar to
the example that even if Researcher basket slips, all eggs will not be broken and the person will not
remain hungry.
1.2. Portfolio Theory:
Harry Markowitz a great author states his point of view in the „Portfolio Selection‟ 1952, which drew
attention towards the importance of diversification in managing portfolio. He emphasized that by the way
of diversification an investor can produce exact similar returns but at minimal experience to the risk or
maximum return at same kind of risk level.
1.3. Understanding Risk and Types of Risk
The term Risk, Researcher can easily describe that is nothing but actually the measurement of expectation
failure that how much will be the risk, which Researcher can face in the process of investment. (Malkiel,
2005)
If Researcher expects that Researcher will receive the certain percentage of return from the invested
stock, but in the actual return differs from the expected Researcher then our risk is heavy.
Loss = Expected return > Actual Return
How much the results will deviate from its mean? How much chance of loss on investment can be
suffered? There are two types of risk associated with the investment-
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1.4. Market Risk
It can be expressed as „systematic risk’; this risk actually affects the portfolio for the most part by macro-
economic factors.
Inflation in the country,
Interest rates fluctuations,
Foreign exchange rates fluctuations,
Economic recession,
Growth of economy, etc.
Due to change in these above mentioned factors, by and large market is effected so the investment
portfolio goes upward or downward. Every company suffers this kind of risks. This Researcher can call
this kind of market risk as market risk as macro risk, as the whole market is affected by this kind of risks,
instead of a single firm.
This macro risk is not able to be condensed by diversification.
1.5. Unique Risk
It can be expressed as „unsystematic risk‟ this is actually a risk related to the specific forum:
If Researcher chooses the stock of any particular company,
How much an investor will suffer the risk
It Is related to the operations, Finance and management etc of the company.
In other terms, it can be termed as micro risk, as it‟s just showing the risk related with a particular firm.
This unique risk can be minimized by diversification of stocks.
The main objective in managing portfolio is to maximize the returns keeping the risk as low as possible.
The researcher is able to minimize the unsystematic risk, but not systematic risk as Researcher can control
the systematic risk of choosing the specific different stock with different risks, according to own choices,
but Researcher can‟t take charge of the market risk, how the market will react towards your investment.
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1.6. Significance of Diversification:
An investor who is intelligent and smart always strives for better and higher returns on his
investment with were exposure to risk.
Risk and returns are correlated; the higher the risk higher is expected return.
If an investor allocates all his investment in high risk stocks, there are more and more chances to
suffer higher losses.
If an investor makes the investment in low risk, stock, risk is low at the same time but returns will
also be here.
1.7. Research Questions:
1.7.1. How to do Diversification:
Diversification is not just like as Researcher goes to the market and purchase the stocks according to
Researcher‟s own choice. It means a lot more than that. The researcher needs the proper guidelines and a
proper strategy to handle the complicated market in choosing the profit oriented stocks. If Researcher
considers the above example, if the whole Automobile sector suffers loss than investor‟s portfolio will see
the overall destruction in value. Therefore, the diversification strategy tells us Researcher should not
invest in just Researcher kind of sector, while Researcher has to diversify our investment in different kind
of sectors and among various asset classes.
Diversification is not a universal remedy. It doesn‟t give assurance to you against loss, however it
smooth‟s the progress of decreasing the risk for an investor and targets to maximize return at the same
time.
Some major points which should be kept in mind in managing portfolio are:-
Allocate investments:
In different kind of shares of similar sector
In different kind of sectors and industries
If possible geographies should also be different
Instruments of diverse risk level
Among the different kind of asset class just like us. Share market, fixed income instruments,
commodities, real estate, mutual funds etc.
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1.7.2. How Many Stocks in Portfolio?
Obviously, ten stocks are better than Researcher stock. But according to the trend, market assessment and
discussions with brokers Researcher found that Researcher can pick up 15-20 stocks spread over different
sectors.
1.7.3. Does Diversification Help? Example:
Yes, diversification does reduce risk. To understand the whole scenario of diversification with a small &
simple example:-
Suppose there are only two Automobile players in the market „Corolla‟ and „Honda‟. Both the companies
are the competitors of each other. In which company should a person invest? The first option is to invest
in the company „Corolla‟, But due to higher prices of spare parts, Corolla loses its durability and lose its
market share, thereby market share of company „Honda‟ increased because Honda maintains its quality
by importing the spare parts from other countries where the prices of spare parts are cheaper in prices.
(Malkiel, 2005) Thus the revenue and profit of „Honda‟ will increase, so the value of their shares. So in
this scenario, investors may lose by investing in the Corolla Company.
In detailed scenario, Researcher will practically examine this scenario.
1.7.4. Caution: How Much Diversification is Feasible?
Researcher all think that more is better. But in this case more is not better at all. Too much diversification
would not help the investor; here comes the concept of diminishing marginal return. By taking the stocks
more to the 15-20, result in the increase in our income and decrease our risk, but in decreasing the rate
and after a point it would not help at all. Though diversification helps in reducing the risk but Researcher
should not be too greedy to intention of more return. Be reasonable.
1.8. Hypothesis:
By preparing an efficient pool of investments, profits can be maximized through the overcome on
losses.
Higher the risk, higher the return
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By comparative analysis, profits are more on diversification instead of a single investment.
1.9. Objectives:
Here is our research objective to study the portfolio management behaviour of the investor and
learn how to manage the risk.
How much efficiently the portfolio is managed by the investor or built the portfolio of our
investment
The researcher will analyse the relative importance of portfolio management.
What is the relative importance of the main factors in shaping overall portfolio management?
To validate the relationship between investment behaviour of investor on his portfolio
management behaviour.
Most important objective: Comparative analysis of both types of investments. Whether whole the
investment put into Researcher basket or diversification is different sectors are efficient?
By removal of biases and errors, returns are high or not?
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Chapter 2
LITERATURE REVIEW
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2.0. LITERATURE REVIEW
Barber, and Odean, (2000) found that a balanced portfolio consisting of the combination of stocks and
bonds provide a higher rate of return rather than investing in the Researcher type of security only. The
perception built by some investors is that bonds are the superior investment due to the repayment of
higher interest rate. Actual results are different than the assumptions that have been proved by a model
known as “Capital Asset Pricing Model”. The securities which consist of Bonds & Stocks are evaluated in
the model‟s context and the measure used to determine the level of risk is “Standard Deviation”. When
talking about the element of risk, considering it was equal in all securities, investors would like to choose
such securities that are providing the greater returns. An author, Sharpe has proved he's saying by
drawing some combinations of graphs, comparing two variables “Risk & Return”. Risk has been taken as
an independent variable while the return in dependant. In the first example, Three points (P, M & N) have
been used where P = Riskless Investment, M = Risky Securities and N = Borrowed Funds. The
combination of MP (led to MP cave) is representing the collective investment in both risky and riskless
securities while MN (led to MN cave) representing the Borrowed funds used to buy the securities plotted
at point M. The graph is proving that the best is to select the combination of MP for a desired rate of
return which means the balanced investment in risky and riskless securities. In the second example, the
same has been proved but by segregating the stocks with “S” and Bonds with “B”. For further analysis,
W. F. Sharpe has taken the data of the DJIA) from 1938 to 1973, consisting of 40 corporate bonds and
stocks. The risk has been measured by applying the standard deviation and calculating it in CAPM. The
results indicate the favourable circumstances of return if combine both securities. The conclusion is that
the combination of both risky and riskless securities which is also known as a “Balanced Portfolio” is
extremely good for a higher rate of return.
There should be minimum 30 stocks in a portfolio to make it effectively diversified. The stocks should
include 30 for the borrowing investor while 40 for the lending investor. It‟s been a great argument that
how many stocks should make a Well diversified portfolio and the opinions and research of several
researchers vary as according to “Evans and Archer”, 10 stocks are enough to make a diversified portfolio
and the saying has been adopted by many textbooks but in fact it was wrong when tried to prove by using
the Capital Asset Pricing Model. While according to “Stevenson & Jeanings,(2000)”, 8 to 16 stocks will
be good for a portfolio. So, several studies produced varying concepts about it. All the statements
published in different textbooks are contradictory to each other. The risk in any portfolio can be measured
by calculating the variance and co-variance of stocks. The change in total number of stocks will affect the
level of risk. If the total number of stocks is higher, the diversification will be more efficient as it will
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result in minimum variance or minimum level of risk. The same has been proved by an analysis similar to
“Blume & Friend”. The formula consists of a portfolio combination of lending as Well as borrowing
investor. The findings stated clearly that in the minimum number of stocks, the deviation was higher
which means the level of risk was more and in a number of stocks, the result was opposite. So, at least
stocks ranging from 10 to 15 will exhaust the benefits of the portfolio diversification.
Risk is always found in both the cases, while you are selecting a portfolio to invest in, and even analysing
the security. The risk found in security is the uncertain fluctuation in its price while in the portfolio; it‟s
the uncertain market value of it in future. Definitely the level of risk varies in both securities and
portfolios if compared but both are related to each other as the combination of securities make up a
portfolio. This argument has been carried forward by using two different quantitative methodologies
known as “BETA” (used to test the market sensitivity) & “Portfolio Diversification” (investing in a
number of securities rather than 1 only). The involved risk has been divided in two parts known as
“Market Risk” (As the future of marketing is difficult to estimate) & “Non-Market Risk” (Still found even
you estimate the future condition of market). Both types of risks depend on the level of price sensitivity
and diversification respectively. These risks affect the market sensitivity. The market swing affects the
security prices to greater or lesser extent and the swing occurs due to the perceptions or opinions of
investors about the future circumstances of the economy. Due to it the companies whose securities are
being traded effect to any extent (higher or were) while comparing with each other. (Evans and Archer,
2000) Here the importance of diversification can be judged. The investment or fund managers use the
methodology of diversification to minimize the risk that can affect the economy and their investments and
might downgrade the expected returns. In simple context, if the expected rate on a security falls while the
other‟s grow, it will result in a balanced rate of return so Researcher can say that diversification has
reduced the non-market risk but this measure is not a hard and fast rule. Let‟s say if two portfolios “A”
(having 20 different securities) & “B” (having half same securities and half varying) are there. Defines if
the price fluctuations are more in stocks of “A” portfolio than “B”, diversification will not save its
expected returns. In this case, “B” will result in better returns. An analysis to check the market sensitivity
of portfolio has been made by using a table. The analyst took 3 securities and their current market prices
and then multiplying all, got the total market value of the portfolio. Each stock‟s total value was divided
then on total value and got the relative value stated as “V”. Estimated market sensitivity of all stocks was
compared with relative value time‟s market sensitivity and finally calculated the total of this value and
concluded the portfolio estimated market sensitivity of 1.10. Now what concluded was that value of
BETA is equal to 1 while our result is 1.10 which states that the portfolio is almost very near to the
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systematic risk. In second table diversification of 2.70 has been calculated by including relative non-
market risk. Finally increase in diversification causes decrease in non-market risk.
Markowitz (1952, 1959) described the advantages of risk reduction by holding the diversified portfolio
and the same argument was taken in details by many authors to get that rate on which those benefits can
actually be attained by holding a diversified portfolio. The focus has been made on “Naive
Diversification” (Randomly selected and equally weighted portfolio). “Evans & Archer (1968)” got the
measure of portfolio risk by using standard deviation and their findings was a very low reduction in risk
from a portfolio ranging between 8 to 10 securities. The methodology used by them was: they built 40
portfolios of increasing size and selected those securities from a random sample of 470. Then calculated
the average/mean return on each portfolio over 10 years duration and also calculated the standard
deviation of half yearly returns. To get the 60 different observations, the same process was repeated 60
times. By doing that, they got the estimation of the risk associated with a portfolio of increasing size and
supported their belief. Finally the equation was applied to the data to see the findings. The calculated
results (Ratio of estimated risk to a-diversifiable risk) by “Evan and Archer” Were vary from the actual
results. A relationship between the size of the portfolio and its standard deviation has been developed
which clearly states that the key parameters of the equation, employed by Evan & Archer are biased. The
reason in the occurrence of this bias was the overestimation of that rate, which was used in the eradication
of un-diversifiable risk with increasing size of portfolio. The findings stated that the considerable
reduction in the level of risk in a portfolio can be attained by increasing the size of the portfolio.
Both the individuals and investors have started investing in capital markets around the world and
diversifying their portfolios globally. From the prospective of American and Japanese investors, GAINS
including the fluctuations in international exchange rates have been evaluated with the help of taking
securities into account during the period of year 1978-1989. (Bettis, and Mahajan, 1985) These securities
include both Bonds and Stocks. The findings got by testing the data state that if the parameter uncertainty
is absent, both American & Japanese can have attractive gains by international diversification, but the
difference will be that, Americans will get the gains in the shape of higher return while not due to be
risks. Japanese will get due to were risk which is opposite direction. For attaining international
diversification, American investors should use the hedging of bonds because exchange rate uncertainty is
a threat to both U.S and Japan, but the hedging exchange risk will be beneficial for American investors
but not for Japanese investors. These reasons indicate that the stocks are widely used and more famous
than bonds for international diversification. The researcher should definitely consider stocks to buy
globally to make up the international portfolio.
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Roger B Upson et al explained some strategies of portfolio diversification by explaining that some of the
security analyst selects stocks which have the highest potential and the manager will only focus on those
stocks which are being told by the security analyst. A manager who holds a diversified portfolio will get
higher returns on the stocks, that is they always should have a passive strategy while maintaining a
portfolio.
Author used two variables in his research Researcher is range and other Researcher is standard deviation.
If Researcher talk about the range, as the more stocks is added in the portfolio, the range is reduced
significantly as the number of stocks increased
The author named as (Fisher, et.al., 2001) tried to explain the article about diversification by the numbers.
A 30 stock portfolio has a vast diversification with 95% benefits. All investment professionals had a
common belief which was based on the research that was conducted by Fisher and Lorie. Reduction in
dispersion was measured by F&L which was achieved by the portfolio of various sizes. (Fisher, et.al.,
2001)There was a reduction in risk as characterized by diversification or specified risk and non-diversified
or market risk. So, the postulate was to avoid the specific risk and to deal with the market risk. R-squared
and tracking error is the basis for measures of diversification.
F&L analysis was repeated in which portfolio opportunity distributions have created all possible
portfolio of a given size that could be a heel from stocks in the composted database. The analysis for
portfolio of various sizes (January1986-June1999) shows as the number of stock increases standard
deviation decreases. It means if the investment is more diversified there will be less chances if risk and
vice versa. The results are significant for portfolio manager as Well as for the investor. They shouldn‟t
invest in only Researcher stock because there are more chances of risk, investment should be diversified
so that they can earn well and so it can help to increase the number of figures.
In diversification process of portfolio, there is a significant effect of the relationship between BETA and
Variance. Although some investors still have a perception about risk not being the part while analysing
portfolio and to invest in. The concept of BETA coefficient extracted from the portfolio approach which
states that the risk of portfolio is evaluated as a whole by investors rather than analysis of each security
individually. The conclusion of this portfolio approach is that, to measure the level of risk involved in the
portfolio, the comparison of variance of the return on a security with the return of market portfolio is
required. According to “Evans & Archer”, the increase in the whole portfolio size causes the increase in
diversification as Well. According to “Miller & Scholes”, there is a positive correlation between BETA &
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Variance of common stocks. BETA is representing the market risk while the variance is presenting
residual (No Market Risk). They tested the relationship between both kinds of risks and then their effect
on the diversification process of the portfolio. The methodology adopted to prove it was: they tested the
relationship between BETA and Variance from July 1963 to 1973 (10 years) and 2 non overlapping 5
years of sub period for individual securities. The data regarding the adjustment of end prices of all stocks
and their dividend and splits were gotten by composted industrial tape of each stock. The calculation of
BETA was supported by regression of time series of monthly log price of each security on monthly log
price of Standard & Poor‟s 500 stock indexes. To improve the normal level of prices, monthly log was
used and also to see the percentage change in prices. To what significance, BETA affects the portfolio
diversification was measured by comparing the non-market risk of high and low beta stock portfolios that
were having the securities from 2 to 25. The conclusion finally supported the sayings of “Miller &
Scholes” that the association between BETA and Variance has an impact on diversification of portfolio.
RUMELT'S 1974 studied and demonstrated that the firms that use their investment in more than
Researcher stock significantly face were levels of risk than the firms that are diversified in an unrelated
manner. A study shows empirical support for diversified firms. For better performance in corporate sector
Rumelt (1974) and Porter (1985) has provided few guidelines. A) When firms achieve competitive
advantage it helps to were its systematic risk and to make higher returns. b) Only those firms can achieve
best competitive advantage. Predicted advantages and performance outcomes show single businesses have
a neutral effect on risk and neutral effect on the shareholder‟s return while constrained businesses have
dampen the effect on risk and amplify the effect on returns. Furthermore, linked businesses have middle
dampen the effect on risk and middle dampens effect on returns.
Risk is always found in both the cases, while you are selecting a portfolio to invest in, and even analysing
the security. The risk found in security is the uncertain fluctuation in its price while in the portfolio; it‟s
the uncertain market value of it in future. Definitely the level of risk varies in both securities and
portfolios if compared but both are related to each other as the combination of securities make up a
portfolio. This argument has been carried forward by using two different quantitative methodologies
known as “BETA” (used to test the market sensitivity) & “Portfolio Diversification” (investing in a
number of securities rather than 1 only). The involved risk has been divided in two parts known as
“Market Risk” (As the future of marketing is difficult to estimate) & “Non-Market Risk” (Still found even
you estimate the future condition of the market). Both types of risks depend on the level of price
sensitivity and diversification respectively. These risks affect the market sensitivity. The market swing
affects the security prices to greater or lesser extent and the swing occurs due to the perceptions or
opinions of investors about the future circumstances of the economy. Due to it the companies whose
securities are being traded effect to any extent (higher or lower) while comparing with each other. Here
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the importance of diversification can be judged. The investment or fund managers use the methodology of
diversification to minimize the risk that can affect the economy and their investments and might
downgrade the expected returns. In simple context, if the expected rate on a security falls while the
other‟s grow, it will result in a balanced rate of return so we can say that diversification has reduced the
non-market risk but this measure is not a hard and fast rule. Let‟s say if two portfolios “A” (having 20
different securities) & “B” (having half same securities and half varying) are there. Defines if the price
fluctuations are more in stocks of “A” portfolio than “B”, diversification will not save its expected
returns. In this case, “B” will result in better returns. An analysis to check the market sensitivity of the
portfolio has been made by using a table. The analyst took 3 securities and their current market prices and
then multiplying all, got the total market value of the portfolio. Each stock‟s total value was divided then
on total value and got the relative value stated as “V”. Estimated market sensitivity of all stocks was
compared with relative value times market sensitivity and finally calculated the total of these values and
concluded the portfolio estimated market sensitivity of 1.10. Now what concluded was that value of
BETA is equal to 1 while our result is 1.10 which states that the portfolio is almost very near to the
systematic risk. In other words the risk of portfolio is almost equal to the market risk and portfolio is
efficient. In second table diversification of 2.70 has been calculated by including relative non-market risk.
Finally increase in diversification causes decrease in non-market risk.
Markowitz (1952, 1959) described the advantages of risk reduction by holding the diversified portfolio
and the same argument was taken in details by many authors to get that rate on which those benefits can
actually be attained by holding a diversified portfolio. The focus has been made on “Naive
Diversification” (Randomly selected and equally weighted portfolio). “Evans & Archer (1968)” got the
measure of portfolio risk by using standard deviation and their findings was a very low reduction in risk
from a portfolio ranging between 8 to 10 securities. The methodology used by them was: they built 40
portfolios of increasing size and selected those securities from a random sample of 470. Then calculated
the average/mean return on each portfolio over 10 years duration and also calculated the standard
deviation of half yearly returns. To get the 60 different observations, the same process was repeated 60
times. By doing that, they got the estimation of the risk associated with a portfolio of increasing size and
supported their belief. Finally the equation was applied to the data to see the findings. The calculated
results (Ratio of estimated risk to a-diversifiable risk) by “Evan and Archer” were varied from the actual
results. A relationship between the size of the portfolio and its standard deviation has been developed
which clearly states that the key parameters of the equation, employed by Evan & Archer are biased. The
reason in the occurrence of this bias was the overestimation of that rate, which was used in the eradication
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of un-diversifiable risk with increasing size of portfolio. The findings stated that the considerable
reduction in the level of risk in a portfolio can be attained by increasing the size of the portfolio.
The father of modern portfolio theory MARKOWITZ was a person who actually focused and felt the
need of diversification if Researcher look in the year 1952 when his paper “Portfolio Selection” was
published in the Journal of Finance. His work was much better than the Nobel Prize winners SHARPE
(Wrote paper on CAPM) & MILLER (Wrote paper on Capital Structure) in 1990. According to the article
of DANIEL BERNOULLI (1738), an investor who wouldn‟t adopt the risk based strategy would like to
diversify his investment. He recommended dividing the small risk into many portions rather than putting
all in Researcher and losing all but he wasn‟t the only Researcher who said so. In 1906, IRVING FISHER
recommended in “THE NATURE OF CAPITAL”, to measure the level of risk, Researcher must use
Variance. Then in 1938, JACOB MARSCHAK recommended to calculate means & and covariance
matrix of consumption to test the utility. According to MARKOWITZ (1991) he got the idea of basic
portfolio theory after reading the written observation of JOHN BURR WILLIAMS who introduced the
formula of Gordon Growth while MILLER strongly suggested the Dividend Discount Model to use.
According to Williams, all risks could be diversified. The prices of bonds are always fixed and a coupon
has to be received on it so it doesn‟t include the element of premium risk which is found in a risky
securities. In risky securities, the addition of this risk premium suggests the intrinsic value of that. So if
such both types of securities, (risky/riskless) are combined of diversified, any loss occurred will
automatically be covered by the profit obtained from the interest rate of less risky securities. The same
conclusion was also drawn by JACOB BERNOULLI in 1713. The Researcher most important aspect of
diversification explained by MARKOWITZ was that diversification can never completely eradicate the
element of risk in the portfolio but it might help to minimize it. The researcher can draw a conclusion
from his saying that the term RISKLESS never mean ZERO RISK. Risk is always there. According to
him, an investor will like to evaluate the risk of the entire portfolio as he isn‟t interested to see the own
risk of security. The measure, he will use will probably be the variance of whole portfolio he is creating
and it‟s understood that a security risk will be seen in context to the whole portfolio risk which will create
the relationship between them. He also suggested that security shouldn‟t be analysed but in a group and
the decision to acquire the security shouldn‟t only base on the calculated variance and the return it will
pay rather on what the investor wants to have. MARKIWITZ designed a model to choose the portfolio,
which is known as “Mean Variance Model”. He suggested the investor to create the portfolio based on
semi variance (more superior than variance in computation) and mean. The basics explained by him have
been refined over the years and being adopted and used by many portfolio managers in the modern era.
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His approaches are used to measure the performance of the portfolio. The portfolio managers not only let
it limited to the scope he had defined, but also got its effects on risk and valuation of the portfolio.
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Chapter 3
Methodology
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3.0. Methodology:
3.1. Overview:
This chapter explains the methods for doing the research in a reader and exploratory way. Firstly
researcher did the literature review for the analysis of the secondary opinions. In this phase, researcher is
going to analyse the study, according to own view. (Peter & Praetz.1997) For this purpose, researcher
tried to explain and justify the research questions, objectives through research design and methodology.
This research methodology will be examined through survey, questionnaire, interviews and practical
examples.
This research is based on the actual scenario to understand the portfolio management behavior of
individual investors by the way of efficient diversification methods. In this project Researcher
tried to explain the importance of diversification of investment instead of single investment.
Then the results which suffered by an investor is studied. Researcher collected data by obtaining
direct responses from brokers, mutual fund managers, some investors, and some internet sources.
First Researcher collected data with the preliminary interviews with some brokers. After
collecting the information from brokers, Researcher use the official Websites to collect the
desired information like market indexes, stock‟s historical prices and some other data. Different
types of financial formulas used by us i.e Beta calculations, CAPM calculation, intrinsic values
and dividend growth etc. The software packages used Spread sheet to analyze the data. After
getting all the data and make some analysis, Researcher found that how much diversification is
more profitable than fixed income securities.
3.2. Research philosophy
Research philosophy is the term to identify the strategic methods and philosophies to support the study. It
has two types of the philosophies. One is the positivism philosophy and second is the interpretivism.
3.2.1. Positivism philosophy:
Positivism theory is based on the positive exploration of the social realities of the study. Positive attitude,
ideas, observation and reasoning are the essential aspects of this philosophy. In this step the study will go
towards the positivism to see the portfolio management through observation of the quantitative data. This
data will be obtained through knowledge and experience. This technique is also explained through
inevitable, experimental and public scenarios.
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3.2.2. Interpretivism philosophy:
The other approach is to enable the analysis on the basis of the thinking according to the researcher‟s own
mind. This is based on the level of thinking and interaction with the people around their cycle. This is
actually also believes on the explanatory research based upon the understanding of phenomena and the
meanings approach.
3.3. Research approach
Research approach is based on two methods. One is the quantitative approach and second is the
qualitative approach. The first collection of the data and then the outcomes will be based on the collected
data is the basic theme of the research approach. In these approaches, the authors are more concerned
about that why the things happened and how?
3.3.1. Qualitative Approach
Qualitative approach is based on the descriptive nature of research. It enables the researcher to forsee the
aspects of research. This approach consists of experiments, surveys, techniques and observations and
these all techniques are enabling the data to express in descriptive form.
3.3.2. Quantitative Approach:
This approach is actually based upon the mathematical and numerical nature. Firstly, analysis will be
done in this technique through some methodologies and this data will be in numerical form. (Bettis, and
Mahajan, 1985) These numerical form data, enabling the researcher to forsee the organizational condition
through quantitative measures or techniques.
In this dissertation, the researcher adopted both of the ways for doing the analysis. Firstly qualitative data
have been collected and converted this data into the quantitative form, after that it gave the results.
3.4. Researched reasoning:
There are two types of research reasonings, one is the deductive reasoning and second is the inductive
reasoning. Its main goal is to identify the exploratory and explanatory data. Deductive reasoning is
defined as the data collection from general to specific research study. (Adler, and Dumas, 2000) At the
start, the researcher did the research on the basis of interests, assumptions, which leads to the observation.
Second is the Inductive reasoning which is based on the specific to general assumptions and procedures.
In this dissertation, both of the techniques have some participation to conduct the thorough results.
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3.5. Methodology/Procedure:
In this study Researcher followed the same methodology as is used in research on portfolio management
behaviour and its impact on investment decisions. Then Researcher picked the Karachi Stock Market,
from official Web sites, brokers, & investors, to study the portfolio management behaviour of investors
and collected data to proof, how much authenticity available in this theory.
Researcher adopted the practical scenario by investing an amount by creating a diversified portfolio to
prove the hypothesis developed by us. Researcher diversified our investment in different areas with the
breakup of Stocks, daily trading, mutual Funds.
Researcher applied both quantitative as well as a qualitative method for analysis. Researcher opts for
qualitative approach, in defining the determinants of investment behaviour and factors that may affect
their financial decisions, by conducting face to face and telephonic interviews with the brokers, reviews
of financial statements, news regarding that company.
For quantitative analysis Researcher used different statistical tools and techniques, e.g. BETA of
securities, required rate of return, intrinsic values of all securities, Correlation and yearly dividend growth
models through the overall view of financial statement, which Researcher used to obtain the results of the
study. The software package used Spreadsheet.
After collection of all the data, Researcher analysed the securities by the way of technical, fundamental,
industry, economy, companies‟ overviews. There are two kinds of approaches to analyse the stocks. The
researcher is the Top down approach and the second is the bottom up approach.
But Researcher will choose the Top down approach to analyse the securities. After getting all the results,
Researcher has to check that our hypothesis proofs true or false.
Researcher adopted the practical scenario by investing 100 million by creating a diversified portfolio with
the breakup of:
Stocks (Rs. 70 million)
Daily Trading (Rs. 2 million)
Mutual Funds (Rs. 20.8 million)
Open Ended Funds
Close Ended Funds
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The approach Researcher used in our diversification project is TOP DOWN APPROACH. Researcher
adopted the following steps in it respectively:
1. Economic Analysis
2. Industries Analysis
3. Technical Analysis
4. Comparative Analysis (Diversification Return vs. Return of investment in a single security
5. Finding & Results
The purpose behind these analyses is to determine the risk and return and then to find the price of
the underlying security.
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Chapter 4:
FINDINGS & RESULTS
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4.0. FINDINGS & RESULTS:-
The first step was the collection of data. How did Researcher start it? Refer attached spreadsheet.
4.1. FUNDAMENTAL REVIEW:
The researcher has to look for financial condition for the companies; potential future growth, e.g. through
annual dividend growth should be analysed thoroughly before taking the final decision on investment or
going further.
The researcher can say that financial statements are very important ingredient of fundamental review,
which Researcher will base majorly besides all calculations. (Treynor & Jack, 2007) It involves looking at
historical performance data and all other financial aspects help to understand the future performance of
the company before making any kind of investment in stocks.
4.2. Fundamental Watch:
Then in each sector, Researcher selected any specific number of companies and collected the data of
(Dividend Yield, Basic EPS, Diluted EPS, P/E Ratio, Return on Assets, Return on Equity) on a quarterly
basis for FY 2010 (March to December) to FY 2011 (March to June). Then Researcher compared the data
with the researcher and each other to find some potential companies. All companies included the
following with respect to their sectors Were as follows. (Annexure 1, 2 & 3)
SECTOR COMPANIES
Automobile Atlas Honda Ltd, Pak Suzuki Motor, Indus Motor,
General Tyre, Honda Atlas Cars, Exide
Textile Fazal Textile Mills Ltd, Kohinoor Textile Mills
Ltd, Gadoon Textile Mills Ltd, Samin Textile Mills
Ltd, Bless Textile Mills Ltd, Hira Textile Mills Ltd.
Oil & Gas Attock Refinery, Shell Pakistan, Pak Petroleum,
Attock Petroleum, National Refinery, OGDCL, Pak
Refinery, Mari Gas Co, Pak Oilfields Ltd, Byco
Petroleum
Cement Fauji Cement Company, Lucky Cement Ltd, D.G
Khan Cement, Dewan Cement Ltd, Fecto Cement
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Ltd.
Banking Allied Bank, Askari Bank, Bank Alfalah Ltd, Bank
Al-Habib Ltd, Bank of Khyber, Bank Islami
Pakistan, Faysal Bank, Habib Bank Ltd, KASB
Bank Ltd, Meezan bank Ltd, MCB, National Bank,
Silk Bank Ltd, SResearcherri Bank Ltd, Standard
Chartered Bank Ltd.
Chemical Descon Chemical, Engro Polymer, Dawood
Hercules, Engro Cop. Ltd, ICI Pakistan, Sitara
Chemical industries.
Fertilizer Dawood Hercules Chemicals Ltd, Fuji Fertilizer
Company Ltd, ICI Pakistan, Fatima Fertilizer
Company Ltd, Fauji Fertilizer Bin Qasim, Engro
Polymer & Chemical Ltd.
Electricity Hub Power Company, Nishat Power Ltd, Kot Addu
Power
4.3. TECHNICAL ANALYSIS:-
As a technical analyst Researcher checked the patterns and indicators on stock graphs that will find out
the security's future performance. Historical performance of a security gives us the indication about the
future performance.
In the technical analysis Researcher looked for the aspects of Demand & Supply, Price Trends & Volume
Trends of each security.
After comparison of data from the first stage, Researcher proceeded with choosing some companies that
attracted us to do the Technical Analysis of them. Technical analysis is a remarkable tool, but it‟s worth
more if it is combined with fundamental analysis.
Technical analysis for companies included the following with respect to their sectors: (Annexure)
How did Researcher do the analysis?
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Researcher got 3 years data of each stock dating from Jan 01, 2009 to September 30, 2011. The researcher
recorded OPEN, HIGH, LOW, CLOSING rates along with change and the volume of each stock for the
whole time period by Karachi stock exchange site. Then Researcher drew two types of graphs with a
combination of:
(a) Each date to the volume traded
(b) Each date to closing rates
These graphs translated the quantitative language into qualitative to help us understanding the upwards
and downwards fluctuations of each stock and the maximum time span of their stability. This step made it
easier for us to choose the stock to invest in to create our own portfolio. By proceeding further,
Researcher continued to our next step.
4.4. CREATION OF PORTFOLIO:-
After completing both steps in detail, Researcher invested Rs. 70 million in stocks. For that matter, every
company whose stocks was bought by us was carefully analysed in two ways.
A. Qualitative Analysis
B. Quantitative Analysis
A. In a qualitative analysis of each company, Researcher discussed the major events occurred
during the year, any investments made, installation and up gradation of plant and other
equipment‟s, introduction of any new product, any future plans/strategies finalized related to the
company‟s growth in the future, awards/ratings got by the company.
B. In quantitative analysis, our basic source was annual reports of the companies.
Researcher calculated some important parameters including company‟s sales, net profits,
dividends announced, earnings per share, assets etc. to make our investment more appropriate and
feasible. Researcher compared the differences in percentages to reach a final conclusion.
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Secondly Researcher used a lot of other quantitative data to be confident in our decision. The
researcher recorded the market index from Jan 1, 2009 to Sep 30, 2011 which is almost 3 years of
data. Then calculated the return of the market by using the following formula:
[P1 - P0 / P0 x 100], where P1 = Latest Value, P0 = Previous Value
Then Researcher recorded the date of each stock in the same time period and applied the
aforementioned formula on that as Well and finally calculated the averages of both (Market Index
& Stock Prices) for comparison to see which Researcher is performing better.
Researcher calculated the beta of each stock and compared it with a market beta of 1 to analyse
which is more risky (Market or Stock).
Researcher calculated the required rate of return & risk free rate of each stock and compared it,
whether to invest in stock or deposit in the bank for interest income. Researcher calculated the
required rate by:
Required Rate: Risk Free Rate + (Market Rate of Return - Risk Free Rate of Return) x Beta
Researcher calculated the intrinsic value of each stock to compare it with the market closing
prices to compare which stock is better to invest. What is the expectation about price? Will it fall
or rise in the future? Researcher calculated the intrinsic value.
Intrinsic Value: Last Year Dividend (1 + Dividend Growth) / Required Rate of Return - Dividend Growth
Researcher calculated the dividend growths in the last 6 years, whether the company paid any
dividend or not. What has been the trend of it? Researcher calculates the growth by:
Total Growth = (Standing Dividend Amount / Previous Dividend Amount) ^ n – 1
4.5. THE STOCKS IN WHICH RESEARCHER INVESTED:-
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On the grounds explained above, Researcher invested in the companies that seemed much attractive. To
discuss the further details, their names along with their number of stocks are as follows.
(Annexure)
COMPANY NAME NUMBER OF STOCKS
National Bank of Pakistan 1,00,000
Muslim Commercial Bank 30,000
Hub Power Company 70,000
Kot Addu Power Company 80,000
Nishat Power Ltd. 1,00,000
Attock Refinery 1,00,000
Shell Pakistan 11,000
Pakistan Petroleum 75,000
Descon Chemicals 6,000
Engro Polymer 1,55,000
Fauji Fertilizer 26,500
Fauji Fertilizer Bin Qasim 49,962
Fauji Cement 1,00,000
Lucky Cement 70,000
D.G Khan Cement 1,42,000
Indus Motors 5,218
Pak Suzuki 10,000
Adamjee Insurance 25,000
Pakistan Reinsurance 2,00,000
Premier Insurance 9,000
TOTAL 1,364,880
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Chapter 5:
ANALYSIS & DISCUSSION
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5.0. ANALYSIS & DISCUSSION:-
The term Risk, Researcher can easily describe that is nothing but actually the measurement of expectation
failure that how much will be the risk, which Researcher can face in the process of investment. (Malkiel,
2005)If Researcher expects that Researcher will receive the certain percentage of return from the invested
stock, but in the actual return differs from the expected Researcher then our risk is heavy. How much the
results will deviate from its mean? How much chance of loss on investment can be suffered? There are
two types of risk associated with the investment- It can be expressed as „systematic risk’; this risk actually
affects the portfolio for the most part by macro-economic factors.
Due to change in these above mentioned factors, by and large market is effected so the investment
portfolio goes upward or downward. Every company suffers this kind of risks. This Researcher can call
this kind of market risk as market risk as macro risk, as the whole market is affected by this kind of risks,
instead of a single firm. Aother can be expressed as „unsystematic risk‟ this is actually a risk related to the
specific forum: In other terms, it can be termed as micro risk, as it‟s just showing the risk related with a
particular firm. This unique risk can be minimized by diversification of stocks. The main objective in
managing portfolio is to maximize the returns keeping the risk as low as possible. The researcher is able
to minimize the unsystematic risk, but not systematic risk as Researcher can control the systematic risk of
choosing the specific different stock with different risks, according to own choices, but Researcher can‟t
take charge of the market risk, how the market will react towards your investment.
REASONING FOR THE INVESTMENT IN FOLLOWING SECTORS:-
5.1. BANKING SECTOR
5.1.1. NATIONAL BANK OF PAKISTAN:
There were indications of improvements in overall economy of the country in 2010. So the demand for all
consumer loans was increasing even with the higher cost of funds. The overall trend of the deposits in the
bank increased. The bank has a core advantage to be owned by Govt. Of Pakistan. Almost salaries and
payrolls of all Govt. Departments are routed from the bank. No doubt that public sector borrowed a lot of
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funds to finance the deficit as compared to the private sector. NBP crossed about PKR 1 Trillion in 2010.
According to financial statements of the bank, the assets increased up to 9.6% than previous. The profits
also increased by 15% last year, along with 15% of interest and 8% of the fee charged incomes. There‟s
also the technology up gradation by the bank to make its operations better than before and for the better
controls & customer services. ATM network is being expanded and new machines are being installed. So
that the connectivity between various branches may be made sure to better serve the customers. The bank
has also got a AAA rating by JCR-VIS rating agency. Bank also got an award of BANK OE THE YEAR
in 2010. The intrinsic value of its share is PKR 318.023 while in the market, the closing price is Rs. 45.80
so it worth to invest in its stock. The dividend is also being paid consecutively for 4 years. The beta is
0.12 which is less than market beta of 1 which means that it‟s safe to invest in due to were riskier.
5.1.2. MUSLIM COMMERCIAL BANK:
If Researcher looks at the audited financial statement of MCB, there is 9% of the increase in profits in FY
2010 than profits as compared to FY 2009. There is a dramatic increase of 17% deposit, 27% investment,
2% advance in the bank. The bank has gained total 4,232,529 customers, which are 9% more than before.
Opened 51 more branches in a year and opened 4,70,505 new accounts. The EPS has increased to Rs.
22.20 from Rs. 20.38. The bank got the award of best Bank-Led Transfer in 2010 at Global MMT awards
in Dubai. It‟s also working hard to improve its infrastructure and IT programs to perform better. The
share closing price in the market is Rs. 173.27 which is more than its intrinsic value of Rs. 142.8332664.
The value is due to higher demand because of improved financial and non-financial performance. MCB is
consecutively paying the dividends from year 2007. The beta of MCB is 0.16 which is less than market
beta of 1 stating is less risky, which is attractive to invest in it.
5.2. ELECTRICITY SECTOR
5.2.1. HUB POWER COMPANY:
The country is suffering from the extreme energy crisis which has ruined the economy of Pakistan. As
electricity is a necessity, the demand is still increasing. The company has improved its power generation
capacity to 17% recently by adding 225 MW to the national grid. It has also improved its hydroelectricity
capacity. Recently the 214 MW power plant of the company has started its operation in April 2011.
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LARAIB ENERGY LIMITED, The subsidiary of the Hub Power Company, is setting up first private
sector hydel power plant of 84 MW in Pakistan/Azad Jammu & Kashmir. The company‟s current plant is
providing 8,115 GWh of electricity to wade which has borne 77.2% load. Financial Statements of
company show an increase of 23.69% in turnover in FY 2011. The asset base has increased to 19.18%
than before. The percentage of dividends announced by the company has increased to 11.11% in recent
year, while dividends are being paid for the last 5 years consecutively. The net profit of the company has
been around Rs. 5.43 billion this year. Due to the higher demands of its stocks, each share‟s market value
is Rs. 41.50 which is more than the intrinsic value of Rs. 27.7. Beta of the company is 0.11 which is much
were than the market beta of 1 so it‟s attractive to invest in.
5.2.2. KOT ADDU POWER COMPANY:
It‟s the KSE 30 index company which is selling to only Wapda, Pakistan. The company is operating on
1600 MW capacity. According to its financial statement review, the turnover of the company in 2011 has
decreased to 13.48% due to the increased costs of sale, but the net profit has increased to 28.38% in recent
year. Company‟s earnings per share have increased to Rs. 7.41 than Rs. 5.78. The current contribution of
the company in load factor is up to 48.4%. The major projects completed by the company were 3 Gas
turbines and 1 steam turbine. Due to high demand of its shares, each is being traded at Rs. 45.10 while its
intrinsic value is Rs. 22.73. Company is paying dividend from 2007 to 2010 consecutively. Its beta is
0.014 which is less than market beta of 1 stating it less risky to invest.
5.2.3. NISHAT POWER LIMITED:
According to financial statements of the company, there is a 1960 % increase in turnover which is Rs.
20,986.89 million as compared to Rs. 1,018.36 million in 2010. The percentage and absolute figures
indicate the abnormal bone in it. The net profit has dramatically increased to 3,882% than last year‟s
profit. The EPS increased to Rs. 5.307 from Rs. 0.135. The current market value of its share is Rs. 15.44
which is much higher than last year pricing of Rs. 9.94. Its overall growing trend is indication higher
performance is just 1 year. The capacity factor/ percentage load has to maximum 96.71% in January
2011. Dividends are not announced yet due to increased receivables but expectation is higher in very near
future. The share of this company is being traded at Rs. 15.11 which is above than the book value of Rs.
10.2 due to high demand. Beta of the company is 0.02 which is less than market beta of 1 stating it less
risky for investment.
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5.3. OIL & GAS SECTOR
5.3.1. ATTOCK REFINERY:
The current financial performance of the company attracted us to buy its stock. According to the financial
statement review, the net profit of the company increased by 1,631% and sales increased by 31.98% in the
year 2011. The asset base of the company increased by 8.71% in recent year. According to the analysis of
the stock performance, its market closing value is Rs. 111.10 while its intrinsic value is Rs. 182.23, which
means that the actual market value will increase in the near future and will benefit if stocks are sold above
its current market value. Company is consecutively paying its dividends from FY 2007 to till now. With
comparing the market return of 0.11226, the company‟s stock returns are higher with 0.136. It predicts the
upward performance than overall market.
5.3.2. SHELL PAKISTAN:
As far as the oil industry is concerned, FY 2010 has been the most demanding year which consequently
has been proved best for oil companies. The best part of the company in FY 2010 has been the payment
of increased cash dividend even after having less profit than FY 2009. The net profit in FY 2010 has been
36.71% lower than FY 2009. Company still paid total 12% dividend which includes Rs. 8 per share and
interim dividend of Rs. 4 per share. No doubt that the company is also suffering from circular debt but its
near expectations are the recovery from Govt. which will cut down the tough time. Still company paid
around 262.24% more dividends this year. Its closing market price is Rs. 219.27 which is more than its
intrinsic value of Rs. 178.67. Company is consecutively paying dividend from year 2007. Beta of
company is 0.008 which means there is almost no risk investing in it.
5.3.3. PAK PETROLEUM:
According to financial highlights of the company, its EPS has increased 35% this year by Rs. 26.331. Net
profit percentage has also been 35% and sales volume increased by 31%. Company discovered Makori
East-1 and Tolanj X-1 in recent year and successfully completed as gas/condensate and gas producer
respectively. Company also installed a compression project which consisted of a battery of 14
compressors at Qadirpur Gas Field. Company won the KSE Top 25 Company‟s award, Corporate
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Philanthropy Award, SAFA award for best annual report. The intrinsic value of its stock is Rs. 148.36
while it is being traded on Rs. 189.57 which means the demand of this stock is higher in the market. The
company is consecutively paying dividends from last four years. The beta of this company is 0.07 which
is less than the market beta of 1. So investing in it is a good decision.
5.4. CHEMICAL SECTOR
5.4.1. DESCON CHEMICALS:
The company is having 30 years of experience in chemical industry whose production capacity is around
30,000 tons per annum. Pakistan Credit Rating Agency has recently marked it with a rating. According to
the financial highlights of the company, it achieved the profit of Rs. 180 million as compared to loss of
Rs. 289 million in last year. The EPS also got positive and to Rs. 1.76 which is its market closing price.
The intrinsic value of company‟s stock is nil but in future the market value will increase. Asset are the
base of the company increased by 54.87% in recent year. Company didn‟t pay any dividend in last two
years but as with improvement in performance, nearly dividend declaration is expected. The beta of
company is 0.08 currently which means the investing in it is less risky but as compared to the market
performance, its own performance is bit lower.
5.4.2. ENGRO POLYMER:
According to financial highlights of the company, its total asset base has increased to 539.48% in last 6
years. If compared with year 2009, the change is 7% increased. The proportion of liabilities has also
increased much than before. The company suffered a loss this year due to incremental costs associated
with new investment. Company has injected its lot of capital in Expansion & Back Integration Project.
This loss doesn‟t mean no investment is feasible in its stocks. In fact, the project will cause the more
revenues generation in near future if used efficiently. The book value of its stock is Rs. 10.4 while in
market, its being traded on Rs. 8.59 which means that the price would increase in future so beneficial to
buy now and sell later. Beta of this company is 0.24 which is much less than market beta of 1 so investing
in it is less risky. With this expectation, Researcher invested in its stocks.
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5.5. FERTILIZER SECTOR
5.5.1. FATIMA FERTILIZER:
Pakistan credit rating agency has rated the company with A in year 2010 as long term rating which
company has successfully maintained. This rating reflects the company‟s ability to complete its projects.
According to financial performance of the company, Urea and CAN (Calcium Ammonium Nitrate) trial
production volumes were sold for Rs. 7 billion just during the trial operations. Company suffered a loss of
Rs. 164 million but it was not due to any inefficient performance by the company but was due to
administration costs and minimum tax liability for the year. During year 2010, maximum production of
UREA was achieved. The asset base of company has increased to 21.42% than FY 2009. Currently cash
flows are negative but in near future, they are expected to stabilize. Currently the book value of its share
is Rs.12.1 but closing price is Rs. 18.85. No dividends have been declared yet. Its beta is 0.09 which is
very near to market beta of 1 which means it has almost same risk as market. Company will soon
commission its NP plant in 2011 while its 4 plants of CAN, Ammonia, Urea and Nitric Acid are working.
Company has expectation of increase in EBITDA of 179.60% in FY 2011 and increase of 107.31% more
in FY 2012.
5.5.2. FAUJI FERTILIZER:
This company has achieved highest ever production scaling new heights with its strong technical
expertise. According to financial statement analysis of FY 2010, the company has increased its
revenues/sales by 24.1%, net profit by 25%. The EPS increased to Rs. 16.25 as compared to Rs. 13
previously. Dividend per share also increased from Rs. 14.15 to Rs. 15.50. Overall percentage of market
share increased 1.5% than previously. Net Asset base has increased by 47.80% in just a year. There all
performance indicators are drawing an upward trend line and are enough to attract the investment in
company. Company got best corporate reports nomination and won 3rd
prize by ICAP and ICMAP.
Company also won corporate philanthropy award in 2010. The intrinsic value of its share is Rs. 426.56
while market closing price is Rs. 161.49. As in future it‟s highly expected to increase its market price so
the stock has worth to buy. The beta of this stock is 0.06 which is less than market beta 1 so indicates less
risky.
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5.5.3. FAUJI FERTILIZER BIN QASIM:
It‟s another company owned by FAUJI Group. JAUJI Fertilizer Company has 50.88% of shareholding in
this company while FAUJI Foundation holds 17.29% shares. The company has stated the highest ever
yearly production of 660,000 tons by DAP plant. It also achieved the highest ever PAT of Rs. 6.5 billion.
It also declared the highest ever dividend of Rs. 6.1 billion. These were the best reasons to buy its stocks.
Other attractions by financial statements include 72.15% of increased profit than previously, increase in
EPS by Rs. 6.97 from Rs. 4.05. The sales volume has increased by 17.79% than before. The intrinsic
value of this stock is Rs. 18.51 while closing market value is Rs. 58.68. It‟s already trading above the
value but as performance is extra ordinary, the prices are expected to be more nearly. Beta of the stock is
0.063 which is less than the market beta. The company is performing much higher than overall market if
the returns of both are compared.
5.6. CEMENT SECTOR
5.6.1. FAUJI CEMENT:
The company is using a first GERMAN plant in Pakistan known as NEW LINE. It has the largest
capacity as compared with plants working in industry with the production capacity of 7,560 TPD. It‟s the
core/competitive advantage of the company. The plant is being utilized at 93% of capacity level.
According to financial highlights of the company, PAT in FY 2011 has increased by 70.4% than FY
2010. Due to excellent utilization of plant, profits by only operations have increased by 61.75% in FY
2011. Improvement in EPS has been to Rs. 0.52 from Rs. 0.30. Company has not yet declared any
dividend to shareholders because of heavy investment in construction of its NEW LINE plant. Other
advantages of this company include ISO 1400:2004 certification as well as ISO 9001:2008 certification.
Book value of its stock is Rs. 13.9 while the market closing price is Rs. 4. Its price is expected to increase
in near future so this stock is an attraction for speculation as well. Beta of company is 0.19 which is less
than market beta of 1 stating that it‟s less risky for investment.
5.6.2. LUCKY CEMENT:
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Lucky cement has the competitive advantage because of achieving economies of scale. The company well
maintains its overhead costs. The costs per ton are lower but fixed. The company adopted a hybrid
technology for expansions which reduces the capital expenditures but with same quality. According to the
financial highlights, the market share of the company has increased by 15.76% which is 18.85% more
than before. Sales in current financial year have increased by 11.07%. The overall production levels in
cement industry have declined due to devastating flood in Pakistan and lack of Govt. spending on public
infrastructure and other development projects. The PAT of company has increased by 26.55% and EPS
has touched Rs. 12.28 from Rs. 9.10 in FY 2011. The EPS has upward trend from consecutive four
quarters of FY 2011. Company is using its own plant to generate its electricity which is known as PEZU
PLANT. Currently company is working on installation of grid station and inter-connection of electricity
supply lines with national grids. The intrinsic value of stock is Rs. 85.13 while closing market price is Rs.
75.52 which will probably expected to grow very soon. The beta of company is 0.09 which is very less
than market beta of 1 so the investment is attracted. The own performance of company is higher than
overall market performance.
5.6.3. D.G KHAN CEMENT:
Financial performance of the company indicates few important facts including 14.14% improvement in
sales in FY 2011 even after the crisis in economy. It‟s the highest level achieved by the company in last 5
years. The overall profit of the company has declined by 26.61% in current year mainly due to increase of
131.01% in admin selling and distribution expenses, increase of 7.83% in finance cost and increase of
4.56% in cost of sales. This year, 244% more payment of the tax (Deferred Tax) has mainly declined the
PAT of the company. Besides all these facts, company has very efficient cash flow management system
where the cash inflows and outflows are projected daily. Company is currently working and completing 3
projects that are (a) Waste Heat Recovery Project [Will help in electricity generation] (b) RDF Projects
(c) ERP Project. Basic EPS of company has declined to Rs. 0.45 from Rs. 0.70 which is expected to
improve very soon. The book value of the stock is Rs. 72.6 and the closing market price is Rs. 20.57
which indicates to improve quickly. The beta of company is 0.13 which is less risky and comparison of
returns state that company is performing much better than market.
5.7. AUTOMOBILE SECTOR
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5.7.1. PAK SUZUKI:
Suzuki is the first automobile company in Pakistan. It‟s power which has the largest dealership network in
Pakistan. It has achieved the highest market share. The cars introduced are set to be economical and
cheaper in prices as compared to others. Suzuki has recently launched a new car SWIFT which has
increased its sales revenue. Company sold 79,138 automobile units in the year. Production increased by
54% this year which will definitely generate more revenues. The design has been liked as it‟s a European
inspired model. According to financial highlights of the company (Only Cars), it has increased its
production volume to 54.50% in FY 2010. The sales have increased by 52.16% in this year. There is
15.17% of increase in total assets of the company. Company‟s overall financials declined due to exchange
rate losses during the year. Secondly 47% of production capacity of plant has been un-utilized. The
current EPS is Rs. 2.6 which has declined as compared to previously. Company announced the dividend
of Rs. 40.1 million. The intrinsic value of stock is Rs. 29 while market closing price is 68.55. The
company has started utilizing its plant efficiently and the exchange rate losses are being adjusted by the
way of hedging. Its actual market value will grow as expected. Company is consecutively paying
dividend for last 4 years. Beta of company is 0.044 which is much less than market beta so the investment
seems less risky.
5.7.2. INDUS MOTOR:
There is no doubt in it that FY 2010 has been much better of overall automobile industry. The year FY
2011 has been very challenging for all companies due to floods in Pakistan so INDUS motor was also
badly affected. Second biggest challenge it had to face was the shocks of supply chain due to devastating
earthquake in Japan. It raised the cost of production of the company and thus the net profit in current year
dropped 20.59% as compared to previous. Still the units sold by company didn‟t decline more than 2%
recently. EPS also declined by 20.33%, from Rs. 43.81 to Rs. 34.90. The dividend payment per share has
been same as last year which is Rs. 15 so no change was made. Toyota is currently benefiting much more
its spare parts department that has achieved 22% increase than last year which is Rs. 2.14 billion in
absolute numbers. Major part was by localization. As the crisis circumstances are better than before so the
plant is working 24/7 to cater the demands. It will achieve its original performance level in very near
future. This share is being traded Rs. 3 above than its intrinsic value of Rs. 186.1 due to higher demands.
Company is paying dividends consecutively from last 4 years. Beta of the company is 0.05 which is less
than market beta of 1 stating it less risky to invest in.
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5.8. INSURANCE SECTOR
5.8.1. ADAMJEE INSURANCE:
Pakistan credit rating agency has assigned AA rating to this company. The company faced a very
challenging FY 2010 just as FY 2009. The reason causing so was the weaker economic situation due to
worst floods which actually impacted the budgetary projections of the current year which led to slow
down the investment potential in the country as we‟ll. Besides such situation, company had 12% increases
in its gross premium in FY 2010. The net premium retention was 60% improved. Overall profit was
declined by 59% due to natural catastrophe in shape of floods. Management of this company is its
strength which is making optimum utilization of funds and due to it, company‟s total assets increased by
29.02%, cash and bank balance also increased by 25%. In retail insurance division, company has been
market leader in FY 2010 and the strong sales performance was due to travel insurance by company. Final
cash dividend was also declared by 15%. EPS of company is Rs. 4.66 as compared to Rs. 4.19 previously.
Intrinsic value of the company‟s stock is Rs. 58.78 while the market value is Rs. 53.52 which means the
expectation is the growth in market price. Company is consecutively paying dividend from last 4 years.
Beta of company is 0.04 which is less than market beta of 1. This company is attractive to invest in.
5.8.2. PAKISTAN REINSURANCE:
Insurance industry has suffered from great losses due to the claims of damaged infrastructure due to flood
in Pakistan which obviously adversely impacted the economy. The company is sole reinsurer in the
country. This company is working hard to strengthen its equity base by planning to expand locally as well
as globally. According to financial highlights of the company, it has 12.21% gross premium in FY 2010
than FY 2009. The net retention of premium has increased by 24.01% in current year. Even after
increased net claims of 86.52%, increased management expenses of 30.73%, PAT of company has
increased by 94.81% in 1 financial year which is amazing. In field of IT, company is investing to improve
the management information system (MIS) to better monitor the business activities and to upgrade the
technology to run the processes efficiently. Company has also completed its (RMS) Reinsurance
Management System. In addition to that, company has won the certification of excellence by
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Management Association of Pakistan, certificate of appreciation by Pakistan Insurance Institute for
participation.
5.8.3. PREMIER INSURANCE:
According to financial statement analysis, there was 19.41% increase in the written premium of company.
Net premium increased by 12.30%. PAT of company is also increased by 126.80%. As the insurance
companies were badly hurt by flood claims, there was still a dramatic increase in profits of the company.
The investment portfolio and income received provided a lot of support to the core business activities of
the company. In FY 2010, company also proposed the cash dividend of 25%. According to JCR-VIS
rating agency, company has a high capacity to meet the policyholder and contract obligations. The rating
of A has been assigned to it.
5.9. SUMMARY
5.9.1. About Purchase:
On October 05, 2011, Researcher invested total Rs. 69,908,727.50 in buying total 1,364,880 stocks.
Researcher bought them on the live prices of stock exchange. Out total cost of purchase included total
broker‟s cost of Rs. 72,687.52 which included Rs. 19,654.27 F.E.D in it and finally leading to Rs. 70
million net costs.
The table containing charges applied by broker is given below.
SHARE PRICE RANGE COMMISSION
0.01-10 0.03
10.01-30.00 0.04
30.01-50 0.05
50.01-100 0.06
100.01-200 0.1
200 & Above 0.13
(Annexure)
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5.9.2. About Sale:
On November 04, 2011, Researcher sold all the stocks purchased on Oct 05, 2011. Total sale price was
Rs. 72,375,346.41. This amount included Rs. 72,687.52 commission charges, Rs. 19,654.27 F.E.D, Rs.
8,334.74 as Withholding Tax in addition. This tax is only applied at sale price and is fixed by 0.0115%.
5.9.3. CONCLUSION
The best advantage Researcher got by investing in different stocks was that Researcher covered all the
losses in our portfolio. Major losses were in banking, electricity and fertilizer sectors. Finally after
deduction of purchase cost from sale price, Researcher earned a net profit of Rs. 2,374,277.11
5.10. MUTUAL FUNDS
These mutual funds companies managed our investment in profitable diversified places and tried their
best to produce efficient portfolio returns.
There are two types of funds in which Researcher have invested also.
1. Open Ended Funds
2. Closed Ended Funds
OVERVIEW OF MUTUAL FUNDS
5.10.1. Economic Analysis:
In the FY 2011, overall performance of equity market has been really good. There were some serious
issues that were faced by the company in FY 2010 which actually affected the performance of the fund.
The devastating flood in Pakistan damaged the crops and other cultivatable lands so the food supply was
shorted. Due to all that, inflation was reached to finally 15.7%. If Researcher compares the inflation rate
from year 2001 to 2011, it has increase from 4.40% to 14.10% which means that the purchasing power of
Rs. 10,000 has declined to Rs. 3,402 now. To control the inflation, State bank of Pakistan raised the
policy rate by 150 basis points. Secondly the boost in exports and remittance inflows in the country
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actually reduced the trade deficit of our economy and the local currency didn‟t depreciate by more than
1% as compared to American dollar. It caused the attractive domestic equity valuation which attracted the
inflows in dollars. Finally the current account of the country performed we‟ll.
5.10.2. Mutual Fund Industry
There are number of financial markets in Pakistan which are grooming rapidly in past decade with some
significant improvement in the global market.
From the year 2001 to 2010, following are the market performance to invest in the stock market for
different countries.
Some facts for the growth of Mutual Funds in Pakistan
There is a rapid growth over the last 10 years.
The average rate of return on the funds are 11 to 12%, p.a.
Prominence on superior corporate governance.
5.10.3. The statistics of the industry growth
Following are the funds in which Researcher invested along with number of shares.
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CLOSE ENDED FUNDS
FUND TITLE NO. OF SHARES
First Capital Market Fund 5,99,000
AKD Golden Fund 8,25,000
Asian Stock Fund Ltd. 4,00,000
OPEN ENDED FUNDS
JS KSE 30 Index Fund 3,50,000
JS Islamic Fund 2,64,800
AKD Index Tracker 2,00,000
Why Did Researcher Invest In?
5.11. CLOSE ENDED FUNDS
It can be defined as “Closed-end funds have a fixed number of shares outstanding and do not redeem
when investors want to sell; instead, the shares trade in the secondary markets (stock markets). Its market
price is determined by demand and supply and is not directly tied to its net asset value.”
5.11.1. FIRST CAPITAL MARKET FUND:
According to the financial performance highlights, NAV per share has increased by 13.72% in FY 2010.
The fund gained Rs. 37.84 million profit in FY 2010 as compared to the loss of Rs. 98.21 million on sale
of investment in FY 2009. It also earned 191.64% more profit on its bank deposits. The PAT of company
also reached to Rs. 27.923 million from Rs. 134.298 million losses in last year which is the great
achievement. The NAV per share increased by 13.72% and EPS reached to PKR 0.93 from PKR (4.48).
Dividends were not paid because of no sufficient funds as major were invested in we‟ll diversified
portfolio. PACRA has ranked this fund with MFR of 3-Star in short term and 2-Star ranking in long term.
Company‟s cash and cash equivalent have increased by 785.58% in FY 2010. According to our
calculation, the fund is offering an average 1.26 required rate of return as compared to average risk free
return of 1.48 which is an attraction. With comparison on average marker return and average fund return,
it‟s proved that fund is working much better than the market performance. Beta of this fund is 0.15 which
is less than market beta of 1. So, the fund is less risky to invest in.
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5.11.2. AKD GOLDEN FUNDS:
This fund is managed by AKD Investment Fund. According to financial highlights and performance, the
fund earned PAT of Rs. 123.33 million in FY 2011 as compared to Rs. 140.61 million in FY 2010. The
reason for dropped profit this year was unrealized loss on investment portfolio while PAT was due to
realized gain on it. The overall return was 14.67% with comparison on KSE-100 Index return of 28.53%
but the fund achieved more than its own benchmark of 13.86%. NAV of each unit also increased by
14.67% from PKR 5.52 to PKR 6.33 which states that company growth was 14.67%. The company
adopted the strategy of investment that was medium to long term. The maximum investment company did
was in Banks (19.01%) and minimum was in supporting services (7.91%). The EPS has declined from
PKR 0.92 to PKR 0.81 which is expected to grow in near future. Company also paid the dividend of Rs.
0.85 per share in FY 2011. Cash and equivalent of the fund was increased by 1.51%. The required rate of
return of fund is 1.46 which is greater than the risk free rate of 1.34 which means it‟s better to invest in.
Secondly with comparison of averages of market and fund return, it‟s been proved that fund‟s
performance is better than the market.
5.11.3. ASIAN STOCK FUND LIMITED:
This fund had got the rating of MFR*3 for three years of weighted average performance from JCR-VIS
rating company. Due to quality of management, company also got AM4+ rating. The financial
performance of the fund has been good in both FY 2010 & 2011. With comparison to FY 2010, income
was declined by 0.43% in current year. The main reason was the flood in Pakistan which affected the
economy as a whole. This fund had not much capital gain on sale of investment in FY 2011 but major net
income was almost equivalent to last year was due to dividend received by the fund so an expected future
loss was covered. EPS of this fund also increased by 4.45% this year which states Rs. 0.94 from Rs. 0.90
in absolute numbers. The dividend of Rs. 0.66 per share was also announced in current year. In current
year, this fund invested maximum portion in Oil & Gas & Banks just like KSE 100 in order to get the
return nearby. Due to market movements, the POL had risen to 11.13% from 10.68%. The trend of
investments is consecutively upwards in last 6 years as stated by 6 years comparison of financial
statements, NAV of fund also increased by 1.41% than before which is Rs. 7.17 from Rs. 7.04.
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5.12. OPEN ENDED FUNDS
Open end funds can be defined as “These funds continually create new units or redeem issued units on
demand. The unit holders buy the units of the fund or may redeem them on a continuous basis at the
prevailing Net Asset Value (NAV).”
5.12.1. JS KSE 30 INDEX FUND:
According to financial highlights of the company, the fund had the loss of Rs. 62.255 million. The
primary reason was the capital loss which is the difference between issuance prices and redeemed prices.
The NAV of the fund was also declined by 6.47 per unit. The rating of this fund is still under
consideration by Mutual fund association of Pakistan and Security and Exchange Commission of
Pakistan. JCR-VIS credit rating company has assigned AM2 (AM-Two Minus) to it which is indicating
that company is having the high quality management. As the state of economy is better than previously,
the expectation is the better performance of fund in near future. With our quantitative analysis Researcher
compared the required rate with risk free rate and found that required rate is greater than risk free
(1.53407 > 1.49945). As compared to overall market performance, the fund is operating above than it.
These were the reasons Researcher invested in this fund.
5.12.2. JS ISLAMIC FUND:
This Islamic fund is also owned by JS Investments. Just like JS KSE 30 Index Fund, its rating by Mutual
fund association and security and exchange commission of Pakistan is under consideration. JCR-VIS has
assigned it AM2 rating that indicates its high quality management. According to financial statements of
the company, the fund earned Rs. 177.730 million profit. NAV of the fund was increased by 23.47 which
was 40.23%. The required rate of return of this fund is 1.526 which is higher than the risk free return of
1.503 so it‟s better to invest in rather than lending to bank. The fund is performing much better than the
market if compared the returns of both. The company had paid stock dividend Rs. 10.90 in year 2010 and
Rs. 42.10 in year FY 2011.
5.12.3. AKD INDEX TRACKER FUND:
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AKD investment tracking fund has given the highest return of 25.44% vs. KSE - 100 returns of 28.53% as
compared to 19.69% of AKD Opportunity Fund NAV and 11.59% of AKD Income Fund NAV. The fund
managers composed it twice in year so that the return may be gained approximately same as KSE index.
Company also focused on minimizing the tracking errors and maintained very low amount of cash and
invested heavily. By valuation of the company‟s financial statements Researcher have known that the
total net assets base has increased by 21.63% in FY 2011. NAV has also increased from 8.28 to 8.63
which have been beneficial for this fund. The fund has got loss of Rs. 17.754 this year but the profit of
Rs. 27.389 million was achieved by adding the element of capital gain, net unrealized appreciation in
value of investments, reversal of impairment loss on sale of investments. Fund‟s cash and cash
equivalents has also jumped by 53.45% in FY 2011. Further the required rate return of funds is 1.37%
which is greater than risk free return of 1.35%. The average return of the fund is much higher than market
return which has been proved by calculations so all these reasons were used to choose this fund.
5.13. SUMMARY
5.13.1. About Purchase:
On September 05, 2011, Researcher invested total Rs. 28 million collectively in both open ended & close
ended mutual funds. The net purchase cost Researcher paid for close ended funds was Rs. 6.219 million
which is the composite of Rs. 42,720 as commission to broker, Rs. 26,265 as F.E.D resulting in total
broker‟s cost of Rs. 68,985.63. Broker‟s commission depends on the share price range and number of
shares purchased. The schedule charges of broker are as follows:
SHARE PRICE RANGE COMMISSION
0.01-10 0.03
10.01-30.00 0.04
30.01-50 0.05
50.01-100 0.06
100.01-200 0.1
200 & Above 0.13
The F.E.D is 0.36 per share so it was applied on total number of shares (18,24,000) in close ended funds.
The net purchase cost Researcher paid for open ended funds were Rs. 21.781 million. No broker charges
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and F.E.D is involved in these types of fund so Researcher purchased total 8,14,6800 shares at Net Asset
Value (NAV).
5.13.2. About Sale:
On November 04, 2011, Researcher sold all our shares of both close and open ended funds. In close
ended funds, Researcher got major a loss in AKD Golden Fund of (Rs. 3, 38,250). Asian Stock Fund
returned us breakeven (no profit no loss). The total broker‟s cost was Rs. 69,699.18 which included Rs.
683.55 as withholding tax in addition to some other costs paid at time of purchase. Consequently
Researcher got net loss of Rs. 3, 45,124.81 in close ended funds.
In open ended funds, Researcher gained net profit Rs. 1.541 million.
5.13.3. CONCLUSION
The best advantage Researcher gained by investing in both types of funds was the loss covered by open
ended funds. Finally total net profit of 1.195 million was earned on Rs. 28 million of investment by us.
5.14. Daily Trading of Stocks
Data Analysis
In our daily trading portion, the very initial step was, Researcher did technical analysis by taking the
historical prices of different companies. Researcher started our daily trade on 5th of October, 2011. So
Researcher took the some companies and gets their historical prices of 1 Researcher before 5th October
i.e. from 26th September to 4
th October, and observed their closing prices, change in the prices, the
average volume traded on a particular day.
These all things Researcher were in the technical analysis where Researcher made the graphs which show
the trend in the closing prices and graphs of the volume. By watching the upward and downward trends in
the graphs the stock of the good companies can be chosen for the daily trading.
The second and the major criteria for selecting the successful stocks was the “Beta” calculation.
Researcher calculated the Beta for all the companies which Researcher considered in our daily trading
transactions. Basically Beta is the Level of Risk in some specific security. The Market Beta is always
Researcher and the beta of some particular stock shows that what will be the required rate of return of that
stock when Researcher use its beta in the CAPM formulae.
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Another criteria Researcher considered was, Researcher took the Risk free returns of different companies
and compared them with the required rate of return. The stock whose required rate of return is better than
its risk free rate of return is considered to be a good security for investment purpose.
The formula Researcher used in calculating the required rate of return of different stocks is the following
formula, which is also known as CAPM.
R.R = RF+ B (RM - RF)
And last but not the least, some of the stocks Researcher has chosen for their goodwill in market, because
those Researchers make the stocks who have established their name as a brand in the stock market and
Researcher can expect that at the end of the day that stock is going to give some return to the investor.
For example as Researcher selected to invest in Hino Pak Motors. Its required rate of return (2.04)was
better that its risk free rate of return(1.83), so Researcher invested in it and at the end of the day it paid off
to us.
SO to cut a long story short, Researcher majorly considered the beta calculation, required rate of return
calculation and most importantly the technical analysis Researcher did before starting our daily trade.
And by selecting the companies on these criteria Researcher made a handsome profit at the end of 1
month daily trading.
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Chapter 6
CONCLUSION
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6.0. CONCLUSION
In our research project, Researcher had developed two hypothesis to prove with the help of
qualitative and quantitative analysis. Our hypotheses were:-
1. By preparing efficient pool of investments, profits can be maximized through the
overcome on losses.
2. Higher the risk, higher the return
3. By comparatively analysis, profits are more in diversification instead of single
investment.
6.1. JUSTIFICATION TO PROVE ALL?
1) Researcher bought total 1,364,880 stocks of companies with Rs. 70 million, bought 26,
38,800 shares of mutual funds with Rs. 28 million and did daily trading with Rs. 2
million. Total Rs. 100 million was invested. Following table is explaining the loss, profits
and net profits/loss finally along with the investment and category.
CATEGORY TOTAL
INVESTMENT
(Rs.)
LOSSES
COVERED (RS.)
NET PROFIT (AFTER
ADJUSTING LOSS + COSTS)
Stocks 70 million (29,43,737.66) 23,74,277.11
Mutual funds 28 million (3,45,124.81) 1,195,339.19
Daily trading 02 million (41,570) 2,32,077.46
TOTAL 100 million (3,330,432) 3,801,693.57
The table is presenting the snapshot of what Researcher did. On investment of Rs. 100 million,
Researcher incurred a loss of Rs. 03.33 million and after paying all the costs including, broker‟s
commission, F.E.D, Withholding Taxes etc., and Researcher got profit of Rs. 3.802 million in
just 30 days. So the pool of investments saved us by adjusting the losses otherwise if Researcher
invested all the invested in such stock which gave us loss, Researcher could lose total
investment.
If Researcher talks in percentage terms, Researcher earned 3.802% net profit on total investment
in 30 days. Calculation made by the following formula: = (3,801,693.57/1, 00,000,000) x 100 =
3.802%.
2) Researcher also proved the statement of higher the risk, higher the return. Researcher
invested Rs. 100 million in stocks, mutual funds and daily trading. Even Researcher
diversified our investment; Researcher was investing in risky areas. There was no risk
free investment by us so even after our analysis and all calculations of beta, required rate
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of return, stock return, market returns etc., Researcher could lose our investment as
Researcher invested even in such stocks, who‟s required rates were less than risk free
rates and Researcher did it on our future forecasting and analysis which is never accurate.
Let‟s take an example if Researcher invested all our Rs. 100 million in risk free rate.
On October 05, 2011, Researcher deposited all 100 Rs. Million in bank for monthly
interests @ 13.35% offer rate by state bank of Pakistan. Our monthly return could be:
In absolute terms, = (1, 00,000,000 x 13.35%/365) x 30 = Rs. 1,097,260.274
In percentage terms, = (1097260/1,00,000,000) x 100 = 1.09%
As Researcher invested Rs. 100 million in creating our portfolio, what Researcher earned is
as follows:
In absolute terms, = Rs. 3,801,693.57 (Stocks Profit + Mutual Fund Profit + Daily Trading
Profit)
In percentage terms, = (3,801,693.57/1, 00,000,000) x 100 = 3.802%.
This comparison is explaining clearly that Researcher have earned 2.712% more by our own
portfolio than investing in risk free rate. So by taking more exposure/risk, Researcher earned
more.
Diversification is not just like as Researcher go to the market and purchase the stocks according
to Researcher‟s own choice. It means a lot more than that. Researcher needs the proper
guidelines and a proper strategy to handle the complicated market in choosing the profit oriented
stocks. If Researcher consider the above example, if the whole Automobile sector suffers loss
than investor‟s portfolio will see overall destruction in value. Therefore, the diversification
strategy tells us Researcher should not invest in just Researcher kind of sector, while Researcher
has to diversify our investment in different kind of sectors and among various asset classes.
It is proved now that “All the eggs should not be placed in Researcher basket”. The meaning of
this quotation is proved now that if basket full of eggs falls, all eggs will be broken. Same case is
with the diversification in this above mentioned case study. Diversification is the method in
which Researcher can minimize the risk of your investment by investing in different kind of
asset classes. In the diversification procedure, investor invest in different categories of sectors,
So still if Researcher sector fails to generate expected profit that investor has understood the
impact can be removed from it or bargain by gains of investments in other category of assets. It
is just similar to the example that even if Researcher basket slips, all eggs will not be broken and
the person will not remain hungry.
3) By taking the practical example above, Researcher has proved that YES, profits are more
if you diversify your investment rather than investing in a single way.
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Chapter 7
BIBLIOGRAPHY:
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7.0. BIBLIOGRAPHY:
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31. Odean, T. (1998). " Are Investors Reluctant to Realize their Losses?" The Journal of
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36. Stephen L. Meyers. (1973) "A Re-Examination of Market and Industry Factors in Stock
Price Behavior," Journal of Finance, pp. 695-706.
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Chapter 8
Appendix:
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8.0. ANNEXURES
Annexure 1:
Date Particulars Dr. Cr. Balance
Opening Balance
100,000,000.00
100,000,000.00
5-Sep-13 Invested in closed-ended mutual funds
6,300,405.63
Invested in open-ended mutal funds
21,701,300.00
5-Oct-13
Invested in 30 different companies of stock
exchange
70,000,069.29
Invested the idle cash for the purpose of daily
trading
2,000,000.00
100,000,000.00
Annexure 2:
SECTOR COMPANIES
Automobile Atlas Honda Ltd, Pak Suzuki Motor, Indus
Motor, General Tyre, Honda Atlas Cars, Exide
Textile Fazal Textile Mills Ltd, Kohinoor Textile Mills
Ltd, Gadoon Textile Mills Ltd, Samin Textile
Mills Ltd, Bleeses Textile Mills Ltd, Hira
Textile Mills Ltd.
Oil & Gas Attock Refinery, Shell Pakistan, Pak
Petroleum, Attock Petroleum, National
Refinery, OGDCL, Pak Refinery, Mari Gas
Co, Pak Oilfields Ltd, Byco Petroleum
Cement Fauji Cement Company, Lucky Cement Ltd,
D.G Khan Cement, Dewan Cement Ltd, Fecto
Cement Ltd.
Banking Allied Bank, Askari Bank, Bank Alfalah Ltd,
Bank Al-Habib Ltd, Bank of Khyber, Bank
Islami Pakistan, Faysal Bank, Habib Bank Ltd,
KASB Bank Ltd, Meezan bank Ltd, MCB,
National Bank, Silk Bank Ltd, SResearcherri
Bank Ltd, Standard Chartered Bank Ltd.
Chemical Descon Chemical, Engro Polymer, Dawood
Hercules, Engro Cop. Ltd, ICI Pakistan, Sitara
Chemical industries.
Fertilizer Dawood Hercules Chemicals Ltd, Fauji
Fertilizer Company Ltd, ICI Pakistan, Fatima
Fertilizer Company Ltd, Fauji Fertilizer Bin
Qasim, Engro Polymer & Chemical Ltd.
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Electricity Hub Power Company, Nishat Power Ltd, Kot
Addu Power
Annexure 3:
Companies Analysis
Products
Refinery
Attock Refinery Limited Processing of Crude Oil and petroleum products supply
National Refinery Limited
Motor Gasoline (MOGAS), Kerosene (SKO), High Speed
diesel Oil (HSD), Light diesel oil (LDO),
Liquefied Petroleum Gas (LPG) etc.
Pakistan Refinery Limited
LPG, Furnace Oil, High Speed Diesel, Kerosene oil, Jet fuel
and Motor gasoline etc.
Oil and Gas Exploration Companies
Mari Gas Company Limited Oil & gas exploration and production
Oil and Gas Development Company Exploration and Production
Pakistan Oilfields Limited
Pakistan Oilfields Limited maintains highly diversified
exploration and production portfolios. E & P Activities,
LPG Marketing, Processing Plant
Pakistan Petroleum Limited
Natural gas supplies besides producing crude oil, Natural Gas
Liquid and Liquefied Petroleum Gas.
The company‟s major clients comprise Sui Southern Gas
Company Limited (SSGCL), Sui Northern
Gas Pipelines Limited (SNGPL) and Water and Power
Development Authority.
Chemical
Clariant Pakistan Ltd
Textile, leather and paper chemicals (for textile, leather, paper),
Pigments and additives (coating,
plastic, printing and specialties businesses), Functional
chemicals ( for Detergents, Performance
Chemicals, Process Chemicals, Specialty Fine Chemicals)
ICI Pakistan Limited
ICI (Imperial Chemical Industries), is the subsidiary company
of AkzoNobel, produces paints and
specialty products (including ingredients for foods, specialty
polymers, electronic materials,
fragrances and flavors)
Fertilizer
Dawood Hercules Chemical Limited
Urea with the brand name "Bubber Sher" and chemicals for
businesses like textile firms.
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Engro Corporation Limited
It is parent company having six subsidiary companies i.e.
Engro Fertilizer Limited, Engro Vopak
Terminal Limited, Engro Polymer and Chemicals Limited,
AVANCEON, Engro Foods and Engro
Powergen
Fauji Fertilizer Bin Qasim Sole producer of DAP in Pakistan
Fauji Fertilizer Company Limited Granular Urea and DAP with the brand name "Sona Urea"
Cement
Lucky Cement Limited
Lucky Cement Sponsored by Well known “Yunus Brothers
Group came into existence in 1996
currently is an omnipotent cement plant of Pakistan, and rated
amongst the few best plants in Asia.
Attock Cement Pakistan Limited
Attock Cement Pakistan Limited (ACPL) is a public limited
company, listed in Karachi stock exchange.
Main business of the Company is Manufacturing and sales of
cement. The main product of the
Company is ORDINARY PORTLAND CEMENT (OPC) but
in addition to this ACPL also
produces SULPHATE RESISTANT CEMENT (SRC) and
PORTLAND BLAST FURNACE
CEMENT (PBFC), which sells under the registered brand
name of “FALCON CEMENT”
in the market. The SRC is special cement, which is resistant to
attack of sulphate salts,
which are present in the soil in the coastal and other saline
areas. The PBFC is also mildly
resistant to sulphate attack, but it‟s important characteristics is
low heat of hydration. It is
used where massive concrete is involved.
Textile Composite
Nishat(Chunian) Limited
It is engaged in manufacturing and finishing operations
consisting of five spinning units,
Researcher Researcheraving
unit, Researcher dyeing & finishing
unit and Researcher stitching unit. NCL operates with 150,000
spindles and 293 air ejet looms
with a monthly
production capacity of
7.5 million lbs of yarn and 4.0 million yards of greige fabric.
Nishat Mills Limited
NML is vertically integrated textile manufacturing company
containing processes spinning, Researcheraving,
processing and stitching etc. Woven, printed, yarn and batch
dyed, and finished fabrics for apparel,
bedding, upholstery etc. Are produced and marketed by NML.
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Commercial Banks
Allied Bank Limited
It offers universal banking services, while placing major
emphasis on retail banking. The Bank
also has the largest network of over 780
online branches in Pakistan and offers various technology-
based products and services to its diverse clientele.
Askari Bank Limited Offers multiple banking services.
Faysal Bank Limited Offers multiple banking services.
Habib Bank Limited Offers multiple banking services.
MCB Bank Limited Offers multiple banking services.
Meezan Bank Limited
It is the is the first and largest Islamic Bank in Pakistan. Is has
developed innovative, viable,
and competitive value propositions that
not only meet the requirements of today‟s complex financial
world, but do so with
world-class service excellence which its
customers demand; all within the bounds of Shariah.
National Bank Pakistan Limited Offers multiple banking services.
United Bank Limited Offers multiple banking services.
Energy
Hub Power Company Limited
The Hub power station was the first project to be successfully
co-financed by several
governments, the World Bank as Well as international
private sector lenders and investors. Today, the Hub Power
Company which is listed
on Karachi, Lahore, Islamabad and Luxembourg Stock
Exchanges has the largest market capitalization of any private
company in Pakistan
and has over seventeen thousand (17,000)
Pakistani and International shareholders.
Kot Addu Power Company Limited
Kot Addu Power Plant (the "Power Plant") was built by the Pakistan
Water and Power
Development Authority ("WAPDA")
in five phases between 1985 and 1996 at its present location in Kot
Addu,
District Muzaffargarh, Punjab. In April 1996,
Kot Addu Power Company Limited ("KAPCO") was incorporated as a
public
limited company under the Companies
Ordinance, 1984 with the objective of acquiring the Power Plant from
WAPDA.
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The principal activities of KAPCO
include the ownership, operation and maintenance of the Power Plant.
Annexure 4 SECTOR COMPANIES
Automobile Atlas Honda Limited, Pak Suzuki Motor Co,
Indus Motor
Textile Deewan Textile Mills Ltd, Kohinoor Textile
Mills Ltd, Mehmood Textile Mills Ltd, Fazal
Textile Mills Ltd.
Oil & Gas Attock Refinery Ltd, Shell Pakistan Ltd, Pak
Petroleum Ltd, Pakistan State Oil Ltd, National
Refinery Ltd.
Cement Fauji Cement Company Ltd, Lucky Cement
Ltd, D.G Khan Cement Co Ltd.
Banking Standard Chartered Bank, National Bank of
Pakistan, MCB Bank Ltd.
Chemical Descon Chemical Ltd, Engro Polymer &
Chemical Ltd, Itehad Chemicals Ltd.
Fertilizer Fauji Fertilizer Bin Qasim, Fatima Fertilizer
Co Ltd, Fauji Fertilizer Company Ltd,
Electricity Hub Power Company, Nishat Power Ltd, Kot
Addu Power
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