Building a Stock Portfolio and Evaluating its Risk and Return

Financial System and Managerial Finance

Course Code: BUS526
Section number: 02

Abu Saad Md. Masnun Al Mahi, PhD

Assistant Professor
BRAC Business School
BRAC University

Date of Submission: 28.04.2024

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 Introductory Page

Name ID Semester Contributions Signature

Poninna Baroi 22164080 Spring 2024 Company Overview: Grameenphone

Tasneem Wahab 21364113 Spring 2024 Conclusion

Md Shahnewaz Alam 22364015 Introduction and Objectives of the

Spring 2024
study

Mehnaz Tabassum 22364058 Spring 2024 Company Overview: Unilever

Md. Asif Iqbal Sami 24164038 Spring 2024 Analysis, findings, and discussion

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 Table of Contents

Introduction..............................................................................................................4
Objectives of the Study............................................................................................4
Company overview.................................................................................................. 5
Introduction to Grameenphone.............................................................................................. 5
Business Operations and Market Position..................................................................... 5
Key Financial Highlights............................................................................................... 5
Risk Factors................................................................................................................... 6
Strategic Initiatives........................................................................................................ 6
Corporate Social Responsibility (CSR)......................................................................... 6
Introduction to Unilever..........................................................................................................7
Products and Services.................................................................................................... 7
Market Position and Brand Recognition........................................................................7
Revenue Streams............................................................................................................8
Profitability.................................................................................................................... 8
Financial Sustainability Considerations.........................................................................8
Commitment to Sustainability and Social Responsibility............................................. 8
Analysis, Findings, and Discussion........................................................................ 9
Analysis and Findings..............................................................................................................9
Discussion................................................................................................................................. 9
Conclusion.............................................................................................................. 10
Appendix.................................................................................................................11

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Introduction

Crafting a stock portfolio is like assembling a robust business strategy, wherein each investment
represents a strategic asset contributing to the overall profitability and resilience of the portfolio.
However, much like in the corporate world, success hinges on effectively managing risks and
optimizing returns. Building a diversified portfolio requires careful consideration of market
dynamics, industry trends, and financial performance metrics. By meticulously evaluating risk
factors and return potentials, investors can construct a well-balanced portfolio composed to
withstand market volatility and capitalize on growth opportunities.

Plenty of helpful tips and pointers are given about the selection of a stock portfolio. Specifics
such as rate of return, risk, and measures of valuation all come into play when discussing the
effective way to choose a stock portfolio. Then an in-depth analysis of risk and return using the
stock market as a testing ground is taken.

Objectives of the Study

The objectives of the study on Building a Stock Portfolio and Evaluating its Risk and Return are
as follows:

1. To understand the fundamental principles of portfolio construction, including asset allocation,

diversification, and investment strategies.

2. To explore the various methods and tools for evaluating the risk associated with individual
stocks and the overall portfolio.

3. To analyze the relationship between risk and return in the context of stock investing and
identify strategies for optimizing risk-adjusted returns.

4. To assess the impact of market dynamics, economic indicators, and industry trends on
portfolio performance.

5. To evaluate different investment vehicles, including stocks, bonds, and alternative assets, and
their suitability for portfolio diversification and risk management.

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6. To provide practical insights and recommendations for constructing and managing a
successful stock portfolio in varying market conditions.

7. To contribute to the existing body of knowledge on portfolio management and risk-return

analysis, fostering informed decision-making and enhancing investment outcomes for individuals
and institutions alike.

Company overview

Introduction to Grameenphone

Grameenphone, commonly known as GP, is the leading telecommunications service provider in

Bangladesh. Established in 1997 as a joint venture between Telenor Group and Grameen
Telecom Corporation, GP has played a pivotal role in revolutionizing the country's
communication landscape. With a mission to empower Bangladeshis with affordable and reliable
mobile connectivity, GP has become synonymous with innovation and customer-centric service
in the region.

Business Operations and Market Position

GP operates in a dynamic and competitive telecommunications market in Bangladesh. The

company offers a comprehensive range of services including voice, data, internet, and
value-added services to both individual and corporate customers. GP's market position is
characterized by its extensive network coverage, technological capabilities, and customer-centric
approach. Despite facing competition from other operators, GP has consistently maintained its
leadership position in terms of market share and subscriber base.

Key Financial Highlights

Over the years, GP has demonstrated robust financial performance driven by revenue growth and
operational efficiency. The company's revenue streams primarily consist of subscription fees,
usage charges, and revenue from value-added services. GP has also diversified its revenue
sources through strategic partnerships in mobile financial services and digital content offerings.

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Despite economic fluctuations and regulatory challenges, GP has maintained a strong financial
footing, generating steady profits and cash flows.

Risk Factors

While GP has enjoyed sustained success, it is not without risks. Regulatory changes and
government policies in the telecommunications sector can impact GP's operations and
profitability. For instance, changes in spectrum licensing or taxation policies can influence GP's
cost structure and investment decisions. Moreover, technological advancements and evolving
consumer preferences pose challenges in terms of maintaining competitiveness and meeting
customer expectations. Economic factors such as inflation, currency fluctuations, and changes in
consumer spending patterns also impact GP's financial performance.

Strategic Initiatives

To address these challenges and capitalize on growth opportunities, GP has implemented

strategic initiatives focused on innovation and operational excellence. The company continues to
invest in network infrastructure to enhance coverage and quality of service, ensuring a superior
customer experience. GP also emphasizes product innovation and digital transformation to adapt
to changing market dynamics and consumer behaviors. Additionally, GP collaborates with local
partners to offer innovative services such as mobile financial solutions, driving revenue
diversification and customer engagement.

Corporate Social Responsibility (CSR)

Beyond its business operations, GP is committed to corporate social responsibility initiatives

aimed at creating a positive impact on society. Through various CSR programs, GP focuses on
education, healthcare, and environmental sustainability, contributing to the overall development
of Bangladesh. GP's CSR initiatives align with its mission of empowering communities and
fostering sustainable growth.

Lastly, Grameenphone stands out as a leading telecommunications company in Bangladesh,

renowned for its commitment to innovation, customer service, and social responsibility. Despite
operating in a challenging market environment, GP has demonstrated resilience and adaptability,

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leveraging strategic initiatives to drive growth and mitigate risks. With a strong financial
foundation and a customer-centric approach, GP is well-positioned to sustain its leadership in the
telecommunications industry and continue making a positive impact on Bangladesh's
socio-economic development.

Introduction to Unilever

Unilever Bangladesh Limited (UBL) is a leading player in Bangladesh's fast-moving consumer

goods (FMCG) industry. Established in 1964 as a joint venture between the Government of
Bangladesh and Unilever, UBL offers a diverse portfolio of everyday household products to
consumers across the country.

Products and Services

UBL caters to Bangladeshi needs with a wide range of products across categories, including:

● Personal care (e.g., soaps, shampoos, skincare)

● Home care (e.g., detergents, fabric softeners, cleaning products)
● Foods (e.g., edible oils, spreads, tea, packaged foods)
● Refreshments (e.g., ice cream, beverages)

The company boasts popular brands like Lux, Lifebuoy, Pepsodent, Sunsilk, Knorr, and Lipton,
making them household names in Bangladesh.

Market Position and Brand Recognition

● Strong brand recognition: Decades of presence and consistent quality have built trust
and loyalty among consumers.
● Distribution network: Extensive distribution channels ensure product availability across
urban and rural areas.
● Marketing and innovation: UBL invests in marketing campaigns and product
development to stay relevant and cater to evolving consumer preferences.

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Revenue Streams

● Product Sales: UBL's primary revenue stream comes from selling its FMCG products
across various categories. Strong brand recognition and a vast distribution network
contribute to high sales volume.
● Potential Additional Revenue Streams: UBL might have additional revenue streams,
○ Distribution and logistics services:
○ Licensing agreements:

Profitability

● Profitability Drivers:
○ Economies of scale: Being part of a large multinational like Unilever allows UBL
to leverage economies of scale in purchasing raw materials and production
processes.
○ Product diversification: A diverse product portfolio caters to various needs and
income levels, reducing reliance on a single product category.
○ Cost management: Operational efficiency and lean practices can keep production
costs under control.

Financial Sustainability Considerations

● Raw Material Price Fluctuations: Prices of commodities like palm oil and other
ingredients can fluctuate, impacting UBL's production costs and profitability. Hedging
strategies can mitigate this risk.
● Currency Exchange Rates: Fluctuations in the Bangladeshi Taka can affect the cost of
imported raw materials and the competitiveness of UBL's exports.

Commitment to Sustainability and Social Responsibility

● Environmental sustainability: Focusing on reducing waste, promoting water

conservation, and using sustainable packaging.
● Community development: Supporting education initiatives, empowering women
entrepreneurs, and promoting sanitation and hygiene awareness.

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Analysis, Findings, and Discussion

Analysis and Findings

Here are the expected return, risk, and coefficient of variation (CV) of stock GP and stock
Unilever:
Factors GP Unilever
Expected Return 0.00% -0.19%
Risk (𝞂) 0.00% 0.80%
Coefficient of Variation (CV) Undefined - 4.09

Now, with respect to the total risk (𝞂) the stock Unilever is riskier as it’s standard deviation is
0.80% higher than that of Grameenphone. Similarly, despite having a negative CV, Unilever is
riskier as to coefficient of variation because a higher CV in absolute terms, even for negative
returns, indicates a riskier investment. However, a negative coefficient of variation is misleading.
The negative expected return of stock Uniever is resulting in this negative CV for stock Unilever.
On the contrary, as Grameenphone’s stock prices were unchanged during 2023 and the expected
return and risk are 0, the GP’s coefficient of variation is undefined.

Moreover, the portfolio’s return and risk of Stock GP and Unilever (consisting of 50 percent of
each stock) is:
Factors Results
Portfolio's Return -0.10%
Correlation Coefficient 0
Portfolio's Risk 0.40%

The Portfolio's Return (-0.10%) indicates a negative return.That means the portfolio lost value
in 2023. A portfolio's Risk of 0.40% represents the volatility of the portfolio. A risk of 0.40%
suggests the portfolio's value fluctuate within a range of +/- 0.40% around its average return.

N.B. All of the above calculations have been shown in the Appendix.

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Discussion

Now that we have examined the individual expected returns, risk (standard deviation), and
coefficient correlation of (and between) the stocks (Grameenphone and Unilever), we can
conclude that, in comparison to owning Stock GP or Unilever separately, a constructed
portfolio most likely helps lower our investment risk. To put it another way, we may spread the
risk by combining the assets with various risk profiles (GP's low risk and Unilever's high risk).
This implies that a decrease in the price of one stock may be compensated by an increase in the
price of another, therefore lowering the volatility of the entire portfolio. Furthermore, the
correlation coefficient of 0 between Stock GP and Stock Unilever. This suggests there is no
linear relation between their price changes. It's not a given that the other stock will drop along
with the first. Thus, this diversification and absence of correlation can lower portfolio risk.

Conclusion

The two firms, Grameenphone and Unilever, are analyzed to provide important information for
building a profitable stock portfolio. Leading telecom provider in Bangladesh, Grameenphone,
has proven to have steady financial results and a commanding market share. It does, however,
confront technological and regulatory problems. A division of the global consumer goods
corporation, Unilever Bangladesh is dedicated to sustainability and social responsibility while
providing a wide variety of products. It is exposed to risks associated with economic indicators,
industry trends, and market dynamics.
Because of its consistent stock price and financial performance, Grameenphone appears to have a
reduced risk profile when compared to the other company. However, because of its volatile stock
price and the fast-paced nature of the consumer products market, Unilever has a greater risk
profile.
In constructing a portfolio consisting of 50% of each stock, the portfolio's return is negative
(-0.10%), indicating a loss in value in 2023. However, the portfolio's risk is relatively low
(0.40%), suggesting that the portfolio's value will fluctuate within a narrow range around its
average return.

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The correlation coefficient between the two stocks is zero, indicating no direct correlation
between their price changes. This lack of correlation allows for effective diversification,
reducing portfolio risk by spreading investments across assets with varying risk profiles.

To sum up, building a successful stock portfolio requires giving extensive thought to market
dynamics, industry trends, company fundamentals, and risk concerns. To reduce risks and
maximize returns, diversification and strategic asset allocation can be helpful. To make sure that
their portfolios are in line with their risk tolerance and investing objectives, investors should
examine and change them on a regular basis.

Appendix

Monthly returns of Grameenphone and Unilever (Jan-Dec, 2023):

Date Grameenphone Unilever
January, 2023 0 0
February, 2023 0 0
March, 2023 0 0.004709
April, 2023 0 -0.026778
May, 2023 0 -0.000312
June, 2023 0 0.000752
July, 2023 0 -0.001219
August, 2023 0 0.000193
September, 2023 0 -0.000784
October, 2023 0 0.000343
November, 2023 0 -0.000293
December, 2023 0 0.000063

Here are the monthly returns of the Stock GP and Stock Unilever:

0+0+0+0+0+0+0+0+0+0+0+0
ReturnGP = 12

= 0.00%

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ReturnUnilever

0 + 0 + 0.0047 + (0.027) + (0.0003) + 0.0008 + (0.0012) + 0.00019 + (0.00078) + 0.00034 + (0.00029) + 0.00006
= 12

= -0.001943833333 ≈ -0.19%

Risk(σ) = click here or scan:

𝑅𝑖𝑠𝑘
CV =
𝑅𝑒𝑡𝑢𝑟𝑛

0
CVGP = 0
= Undefined

− 0.001943833333
CVunilever = = − 4. 09
0.007959569939

The portfolio’s return of Stock Unilever and GP (consisting of 50 percent of each stock) is:

𝑁
Portfolio’s Return, řp = ∑ 𝑤𝑗𝑟𝑗
𝑗=1

= 50% × (0. 00% ) + 50% × (− 0. 19%) [Weight, w = 50%]

= −0.10%

This indicates a negative return, meaning the portfolio lost value in 2023.

The portfolio’s risk of Stock Unilever and GP (consisting of 50 percent of each stock) is:

= 50% × 0. 80% + 50% × 0% + 2 × 50% × 50% × 0 × 0. 80% × 0

= 0.40%

It represents the volatility of the portfolio. A risk of 0.40% suggests the portfolio's value
fluctuate within a range of +/- 0.40% around its average return.

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 Calculating the Correlation Coefficient (ρ) between Stock GP and Stock Unilever:

Month X (GP) X^2 Y (Unilever) Y^2 XY

January, 2023 286.6 82139.56 2,849 8116801 816523.4
February, 2023 286.6 82139.56 2,849 8117610.736 816564.1274
March, 2023 286.6 82139.56 3,046 9275313.892 872851.764
April, 2023 286.6 82139.56 2,138.68 4573942.637 612945.0511
May, 2023 286.6 82139.56 2,061.45 4249566.286 590810.8876
June, 2023 286.6 82139.56 2,055.60 4225491.36 589134.96
July, 2023 286.6 82139.56 2,055.41 4224725.217 589081.5482
August, 2023 286.6 82139.56 2,049 4199816.792 587342.4073
September, 2023 286.6 82139.56 2,024.48 4098510.273 580215.3311
October, 2023 286.6 82139.56 2,025.96 4104510.238 580639.8755
November, 2023 286.6 82139.56 2,017.85 4071736.967 578317.1127
December, 2023 286.6 82139.56 2,019.49 4078358.992 578787.1916
n = 12 ∑X = 3439.2 ∑X^2 = 985674.72 ∑Y = 27191.95 ∑Y^2 = 63336384.39 ∑XY = 7793213.66

12 × 7793213.66 − 3439.2 × 27191.95

=
2 2
[12 × 985674.72 − (3439.2) ] [12 × 62947124.74 − (27191.95) ]

93518563.88 − 93518563.88
=
(11828096.64 − 11828096.64) (755365496.9 − 732936499.8)
0
=
0.000000001862645149 × 20634318.64

=0
The correlation coefficient between Stock Unilever and GP is indicating that there is no
linear relationship between them.

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