205817522 dynamic-asset-allocation

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Executive Summary

Dynamic asset allocation is a strategy used by investment products such as hedge funds, mutual funds, credit derivatives, index funds, principal protected notes and other structured investment products to achieve exposure to various investment opportunities and provide 100% principal protection.

Dynamic asset allocation includes a zero-coupon bond and an underlying investment. Assets are dynamically shifted between these two components depending largely on the performance of the underlying investments, and based on some.

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http://en.wikipedia.org/wiki/Zero-coupon_bond

http://en.wikipedia.org/wiki/Structured_investment_products

http://en.wikipedia.org/wiki/Structured_investment_products

http://en.wikipedia.org/wiki/Principal_protected_notes

http://en.wikipedia.org/wiki/Index_fund

http://en.wikipedia.org/wiki/Credit_derivative

http://en.wikipedia.org/wiki/Mutual_funds

http://en.wikipedia.org/wiki/Mutual_funds

http://en.wikipedia.org/wiki/Hedge_funds



http://www.homeworkping.com/






In some cases, certain products can use a borrowing facility to enhance exposure if the underlying investments experience strong returns. If the underlying investments decline in value, CPPI automatically deleverages, reducing exposure in falling markets.

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Chapter One

Introduction1.1 IntroductionDynamic asset allocation brings out positive return from market segments deemed to be risky by controlling downside risk. An investor can protect his invested portfolio by dynamic asset allocation strategy.

1.2 Background & Origin of the studyThis is the report which we have tried to prepare properly and accurately to fulfill the requirement of the course F-503 titled Financial Derivative. This following report has been assigned to us by our course teacher Dr. Mahmod Osman Imam. I have worked on topic where I had the opportunity to see and learn new things about dynamic asset allocation to insure portfolio. This report reflects about my in-depth understanding about the various aspects of real life application of dynamic asset allocation.

1.3 Rationale of the studyStock market crash occurs due to different reasons. In Bangladesh it occurred three times in its history of six decades. After crash, stabilization package and incentives are offered by government to recover the losses from the stock market by the both institutional and individual investors. After the recent stock market crash in 2011-12, government announced stabilization package and incentives for the investors although there is no positive impact on the stock market of these incentives and package as it was a big enough crash.

1.4 Motivation of the StudyIn recent years Bangladesh stock market has faced serial crashes that made many investors beggars. Investors lost their confidence due to huge loss. Before crash, daily trading volume in Dhaka Stock Exchange (DSE) was around BDT one thousand crore. After crash it was so horrible that the daily volume of trading in DSE never touch the point around half of the previous figure. This is one of the great national problem led us to select the topic to work on.

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1.5 Objectives of the studyGeneral objective

To find out the overall process of dynamic asset allocation to insure portfolio value with immunization by delta.

Other objectives

To understand the impact and importance of dynamic asset allocation in portfolio theory. To acquire knowledge about portfolio management. To identify drawbacks related to traditional portfolio management. To gather knowledge about immunization of portfolio with delta.

1.6 Scope of the studyThe scope of the study is very much effective for the individual and institutional investors to manage portfolio. It is helpful for investors to insure and to immunize the portfolio.

1.7 Limitations of the studyTotal duration of term paper is not sufficient to give us. On the way of our study, we have faced the following problems which may be termed as the limitation/short coming of the study. These are as follows:

The main constraint of the study was insufficiency of information, which is required for the study.

The major limitation of the study was shorter time period. For an analytical purpose, adequate time is required. But we were not given adequate time to prepare such in-depth study.

Such a study was carried out by my for the first time. So, in-experience is one of the main factors that constituted the limitation of the study.

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Chapter Two

Methodology and Approaches of the Study2.1 IntroductionThe study has been performed based on the information extracted from different sources collected by using a specific methodology. The methods of completing the report have included some steps which are followed by one by one.

2.2 Data collectionThe study is descriptive and analytical in nature. First, I have identified the related data which are significant for this study. Then I found out the sources of data which are reliable and easy to acquire and easy to collect and not so time consuming. In order to carry out this study, two sources of data have been used.

Sources of Secondary data

Secondary Sources

Annual Report of DSEDSE WebsitePeriodicals published by the Bangladesh

BankDSE data Archive

JournalsResearch papers, training materials Internet

2.3 Statistical Tools UsedI have used the following mathematical and statistical techniques to analyze and present the collected primary and secondary data in a formalized way.

Tabular presentation Techniques of percentage Graphical presentation using pie chart, line chart, bar chart etc.

2.4 Processing of DataAfter collection of the raw data, by using the following computer packages and software, raw data has done editing and processing to present in a complete and formalized format.

Microsoft Excel-2013 Microsoft Word-2013

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2.5 Data Analysis

The classified and tabulated data has been analyzed elaborately in a number of tables in the analysis part.

Discussing with our group members. Following a sample report. Construct portfolio.

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Chapter Three

Theoretical Issue3.1 IntroductionDifferent persons have different portfolio management needs, some want to maximize the return, some want to minimize risks with steady investment growth, some want constant earnings, and some others want to earn more spending least time. Dynamic asset allocation is one such portfolio management strategy which aims at maximizing the portfolio return by active management of portfolio components.

To construct an asset allocation portfolio, one invests among various asset classes, such as stocks, bonds, cash and others. The returns of the asset classes tend to be affected by different factors and thus, face different risks. Establishing an appropriate asset mix is a dynamic process, and it plays a key role in determining portfolio’s overall risk and return. A very important asset allocation strategy is dynamic asset allocation, with which investor constantly adjusts the mix of assets as markets rise and fall and the economy strengthens and weakens.

3.2 Dynamic Asset AllocationDynamic Asset Allocation is a portfolio management strategy that involves rebalancing a portfolio so as to bring the asset mix back to its long-term target. Such rebalancing would generally involve reducing positions in the best-performing asset class, while adding to positions in underperforming assets. The general premise of dynamic asset allocation is to reduce the fluctuation risks and achieve returns that exceed the target benchmark.

Unlike two other popular portfolio management strategies, strategic and tactical asset allocations strategies, dynamic asset allocation does not involve keeping a fixed investment ratio. Dynamic investors diversify their investments by investing in equities, mutual funds, index funds, currencies, derivatives and fixed income securities. They buy instruments which are rising (or are predicted to rise) and they sell instruments which are falling (or are predicted to fall). Although not common, many dynamic investors keep a reasonable proportion between high-return/high-risk instruments such as stocks and low-return/low-risk instruments such as treasury bonds.

Evaluation of current trends and prediction of future trends on investments are very important with dynamic asset allocation. Investors can use a range of technical and fundamental analysis tools for this purpose. Successful dynamic investors are those who make right buy and sell decisions at right time. There are a few different strategies of establishing asset allocations, and there are outlined some of them and examined their basic management process.

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3.3 Methods of Asset AllocationStrategic Asset AllocationStrategic asset allocation is a method that establishes and adheres to what is a 'base policy mix'. This is a proportional combination of assets based on expected rates of return for each asset class. For example, if stocks have historically returned 10% per year and bonds have returned 5% per year, a mix of 50% stocks and 50% bonds would be expected to return 7.5% per year.Constant-Weighting Asset Allocation:Strategic asset allocation generally implies a buy-and-hold strategy; even as the shift in the values of assets causes a drift from the initially established policy mix. For this reason, may choose to adopt a constant-weighting approach to asset allocation. With this approach, portfolio can be rebalanced. For example, if one asset were declining in value, would be purchase more of that asset, and if that asset value should increase, would sell it. There are no hard-and-fast rules for the timing of portfolio rebalancing under strategic or constant-weighting asset allocation. However, a common rule of thumb is that the portfolio should be rebalanced to its original mix when any given asset class moves more than 5% from its original value. Tactical Asset Allocation Over the long run, a strategic asset allocation strategy may seem relatively rigid. Therefore, it may necessary to occasionally engage in short-term, tactical deviations from the mix in order to capitalize on unusual or exceptional investment opportunities. This flexibility adds a component of market timing to the portfolio, allowing you to participate in economic conditions that are more favorable for one asset class than for others. Tactical asset allocation can be described as a moderately active strategy, since the overall strategic asset mix is returned to when desired short-term profits are achieved. Insured Asset Allocation With an insured asset allocation strategy, establish a base portfolio value under which the portfolio should not be allowed to drop. As long as the portfolio achieves a return above its base, try to increase the portfolio value as much as possible. If, however, the portfolio should ever drop to the base value, invest in risk-free assets so that the base value becomes fixed. Integrated Asset AllocationWith integrated asset allocation there are considered both economic expectations and your risk in establishing an asset mix. Integrated asset allocation, on the other hand, includes aspects of all strategies, accounting not only for expectations but also actual changes in capital markets and risk tolerance. Dynamic Asset Allocation Another active asset allocation strategy is dynamic asset allocation, with which investor constantly adjusts the mix of assets as markets rise and fall and the economy strengthens and weakens. With this strategy investor sell assets that are declining and purchase assets that are increasing, making dynamic asset allocation the polar opposite of a constant-weighting strategy. For example, if the stock market is showing weakness, one sell stocks in anticipation of further decreases, and if the market is strong, one purchase stocks in anticipation of continued market gains.

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3.4 Importance of dynamic asset allocationA number of factors make dynamic asset allocation a viable strategy:

a) The cyclical moves of financial markets: Over a century of market history has clearly shown that dissimilar investment categories behave differently at different times in the economic cycle. The dynamic asset allocation’s challenge is to use technical and/or fundamental analysis to attempt to identify where the cycle are existed and what investment categories appear to have the strongest potential for appreciation.

b) Increase in returns utilizing efficient investing decision: This is a key reason that dynamic asset allocators do not have to be 100% right to produce higher risk-adjusted returns. It is not uncommon for top-performing sectors to experience advances of 50% or more annually. While the downside risk of some market sectors makes investing in these areas potentially dangerous in a fixed asset allocation strategy, dynamic asset allocation can harness their positive features and energize investor portfolios.

c) Efficiency of the strategy with mutual fundsUsing mutual funds in a dynamic asset allocation strategy further reduces risk by providing instant diversification across hundreds of securities within each asset class and allowing investors to move assets overnight between funds with little or no cost.

d) Existence of Bear marketsProperly implemented, a dynamic asset allocation strategy should lessen an investor's exposure to declining markets, blunting the impact of bear markets and preserving capital the majority of prior gains. The more investors lose money in a down market, the more they lose valuable time and opportunity.

e) Importance of technologyComputers and on-line databases have given investment managers powerful tools for analyzing the market and developing complex dynamic allocation models. By back testing these models against historical data, dynamic asset allocators have developed parameters and models, which indicate the asset classes that appear to be in sustained upward trends and should surpass other investments in the current market climate. Given a working knowledge of the markets and cycles, today's allocator can track a multitude of indicators to determine what people are doing in the market and which actions or data signal a fundamental change in economic climate. After weighing the attractiveness of different asset classes, the money manager develops an asset allocation strategy, which distributes monies among different funds/asset classes based on return probabilities. When the asset allocation model indicates changes in the attractiveness of an asset class, monies are moved to different funds.

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3.5 Goals of dynamic asset allocationo Reducing risk & achieving higher risk adjusted return The objective of dynamic asset allocation is to reduce the risk or fluctuation in the value of an investor's account while achieving higher returns than other investments with similar risk. The success of a dynamic asset allocation approach depends upon the ability of the investment advisor to identify those asset classes achieving the highest returns in each market phase. Not every investment decision will be perfect, but over a full market cycle, a dynamic asset allocation approach offers the potential for superior risk-adjusted results, outperforming the impact of taxes and inflation, and leaving the investor with real growth.

o Reducing risk without sacrificing performanceDynamic asset allocation, like a "fixed" asset allocation strategy, seeks to reduce risk through diversification among different investment categories. Using dynamic asset allocation, however, the investor selects or weights investments based on those categories with the greatest potential for superior returns, given current market conditions. The allocation of assets becomes dynamic -- changing in response to market conditions and perceived opportunities for profit. In studies of the performance of money managers, asset allocation decisions, rather than individual stock selection, have been shown to account for 80 to 90% and more of a portfolio's performance. Top performing managers are those who are invested in the best performing asset classes during different periods of the market.

3.6 Benefits of dynamic asset allocationThe practice of dynamic asset allocation (also called tactical or active asset allocation) has grown in recent years due to the success of various computerized market-timing techniques in analyzing market trends. These new technologies typically do not predict future market movements as much as they identify changes in trend direction and evaluate the risk of changes in a trend. With this advanced technology, the asset allocation practitioner can respond dynamically to the market and significantly increase risk-adjusted return over time by:

o Avoiding bear markets and periods of under-performance in the various asset classes--either by reducing or eliminating the allocation of the under-performing asset (e.g., getting out of the market).

o Increasing the allocation of asset classes currently in bull markets that are over-performing.

o Dynamic asset allocation eliminates the key weakness found in the traditional, fixed approach that routinely allows periods of under-performance.

o The portfolio mix of our generic Model Portfolios will shift dynamically over time to avoid periods of under-performance and move into investment types that are performing well. The net effect is reduced losses, lower volatility, higher average returns and a much stronger risk-adjusted return.

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Dynamic approaches to asset allocation are inherently more efficient than the traditional, fixed approach. They can significantly boost returns over time by quickly reacting to changing market conditions for various asset classes and sectors, capturing periods of over-performance and avoiding periods of under-performance.

3.7 Portfolio Insurance ProcessPortfolio insurances a dynamic trading strategy designed to protect a portfolio from market declines while preserving the opportunity to participate in market advances.Several portfolio insurance methods exist and are used in practice. The best-known strategy involves trading in “real” or “synthetic” options. With the introduction of exchange-traded index put options, it seemed theoretically possible for an investor to use these contracts to insure well-diversified portfolios, especially index funds. For some reasons, most investors prefer not to use the option market for insuring the portfolios. Hence it calls for the dynamic trading strategy replicating the option strategy to insure the portfolio. In this strategy the manager replicates an option through a process of continually revising, in a prescribed manner, the proportions of a portfolio consisting of the underlying the asset and the risk-less asset. Besides, the complex nature of the underlying option pricing theory , the dynamic strategy calls for buying more stock when the market is going up and selling off some stock as the market goes down.The basic dynamic trading approach involves replicating the insured portfolio’s price with an ever-changing combination of positions in the underlying portfolio and the risk less asset. The proportions allocated to the underlying portfolio and the risk less asset change every period, so that the dynamic insurance strategy requires a significant amount of trading. We will see in the report that how the same replication is accomplished (approximately) with either a stock portfolio and short futures positions or the risk less futures.The number of units of the underlying portfolio that must be held long at any given moment will be given by the call option’s “delta”, the reciprocal of how many calls it takes to hedge a unit of the underlying portfolio. The call delta tells us the number of units of the underlying portfolio to hold. The amount of the risk less asset to hold is determined by subtracting the value of the held units of the underlying portfolio from the total value of the insured portfolio.

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Chapter Four

Application of Dynamic Asset Allocation4.1 Introduction

4.2 Selected Companies

Code no. Category Name Industry Face Value11137 A IPDC NBFI 1012164 A ISLAMI BANK Banking 1025745 B PADMALIFE Life Insurance 1099613 A BEXIMCO Pharmaceutical 1023603 A BATASHOE Lather 1015302 A PADMAOIL Power 1013201 A AFTABAUTO Engineering 1014293 A RDFOOD Food 1027001 A GP Telecommunication 1018481 A MARICO Manufacturing 10

4.3 Criteria for Company SelectionIn the selection of company I have followed the following conditions

Company must be listed in the Dhaka Stock Exchange.

Listed before January 2013.

Ten different companies from minimum seven different industries

4.4 Static allocationThis part has been done in 2 parts- static allocation and dynamic allocation. In doing the static

asset allocation, 4 scenarios are considered namely-

100% Investment in Equity portfolio i.e. Risky Portfolio. 100% Investment in T – Bill i.e. Risk free portfolio. 50% - 50% investment in Equity and T – Bill (Constant weight) Static 50% - 50% investment in Equity and T – Bill

The stocks have been selected from Dhaka Stock Exchange (DSE). Stocks are selected from five

different industries with the cyclical and counter-cyclical nature of business for diversification.

There are considered T- Bill as risk free asset and there are also considered 91 days T- Bill rate.

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4.5 Scenario 1100% investment in equity portfolio (risky asset)

Assumptions: Amount to be invested is 1000000 tk. Investment horizon is one year. Portfolios are equally weighted after every quarter. Numbers of shares to be invested are determined with closing price of last quarter.

When 100% investment is in risky asset, then money is allocated among the stocks equally. In

first quarter the BDT 100000 amount of money allocated to each company is divided by the

closing price of last quarter of 2012 to get the no. of shares. After finding that, there are

considered the high, low and closing prices for quarter 1. The final number of shares is found by

adjusting the stock dividend. The portfolio value is found out by multiplying the no. of shares

with the corresponding prices. Thus the closing value at and of 1st quarter are BDT 1706270.62.

It will be the amount available for investment for second quarter and the procedure goes like this for

rest 2 quarters.

Name Weight Amount to be Invested

IPDC 0.10 100000ISLAMI BANK 0.10 100000PADMALIFE 0.10 100000BEXIMCO 0.10 100000BATASHOE 0.10 100000PADMAOIL 0.10 100000AFTABAUTO 0.10 100000RDFOOD 0.10 100000GP 0.10 100000MARICO 0.10 100000

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Quarter 1Name Weight Amount

to be Invested

Initial Price

No. of Shares

High Low Closing

IPDC 0.10 100000 18.10 5524.86 22.10 17.25 22.00ISLAMI BANK

0.10 100000 43.80 2283.11 45.00 39.00 42.10

PADMALIFE 0.10 100000 66.00 1515.15 159.00 129.10 130.00BEXIMCO 0.10 100000 64.50 1550.39 574.00 480.36 508.70BATASHOE 0.10 100000 524.00 190.84 329.50 325.10 327.23PADMAOIL 0.10 100000 188.40 530.79 198.80 168.00 170.10AFTABAUTO 0.10 100000 85.80 1165.50 86.90 67.30 74.50RDFOOD 0.10 100000 25.30 3952.57 31.30 17.90 18.30GP 0.10 100000 172.60 579.37 174.90 141.00 147.30MARICO 0.10 100000 378.00 264.55 412.80 339.90 399.60

Portfolio Value High Value Low Value Closing ValueIPDC 122099.45 95303.87 121546.96ISLAMI BANK 102739.73 89041.10 96118.72PADMALIFE 240909.09 195606.06 196969.70BEXIMCO 889922.48 744744.19 788682.17BATASHOE 62881.68 62041.98 62448.47PADMAOIL 105520.17 89171.97 90286.62AFTABAUTO 101282.05 78438.23 86829.84RDFOOD 123715.42 70750.99 72332.02GP 101332.56 81691.77 85341.83MARICO 109206.35 89920.63 105714.29 1959608.97 1596710.79 1706270.62

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Quarter 2Name Weigh

tAmount to be Invested

Initial Price

No. of Shares

High Low Closing

IPDC 0.10 170627 22.00 7755.78

22.30 13.21 16.50

ISLAMI BANK

0.10 170627 42.10 4052.90

43.00 33.90 38.30

PADMALIFE 0.10 170627 130.00

1312.52

159.80 144.50 149.10

BEXIMCO 0.10 170627 508.70

335.42 589.00 480.30 597.90

BATASHOE 0.10 170627 327.23

521.43 356.00 345.60 354.23

PADMAOIL 0.10 170627 170.10

1003.10

459.60 168.60 363.40

AFTABAUTO 0.10 170627 74.50 2290.30

133.10 75.30 106.10

RDFOOD 0.10 170627 18.30 9323.88

25.50 18.30 19.90

GP 0.10 170627 147.30

1158.36

238.00 147.20 178.90

MARICO 0.10 170627 399.60

426.99 655.10 385.20 611.30

Value of PortfolioCompany High Value Low Value Closing ValueIPDC 172953.79 102453.79 127970.30ISLAMI BANK 174274.67 137393.29 155226.04PADMALIFE 209740.03 189658.54 195696.11BEXIMCO 197561.12 161101.19 200546.33BATASHOE 185628.56 180205.70 184705.63PADMAOIL 461024.09 169122.41 364526.01AFTABAUTO 304838.41 172459.30 243000.42RDFOOD 237759.02 170627.06 185545.27GP 275690.70 170511.23 207231.37MARICO 279724.19 164478.34 261021.83

Total 2499194.60 1618010.86 2125469.33

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Quarter 3Name Weig

htAmount to be Invested

Initial Price

No. of Shares

High Low Closing

IPDC 0.10 212547 16.50 12881.63

21.60 16.40 19.20

ISLAMI BANK

0.10 212547 38.30 5549.53 39.00 34.80 36.10

PADMALIFE 0.10 212547 149.10 1425.53 195.00 142.00 161.40BEXIMCO 0.10 212547 597.90 355.49 846.00 556.20 721.20BATASHOE 0.10 212547 354.23 600.03 264.50 262.10 263.45PADMAOIL 0.10 212547 363.40 584.88 391.10 371.40 208.50AFTABAUTO 0.10 212547 106.10 2003.27 127.10 96.50 98.40RDFOOD 0.10 212547 19.90 10680.7

526.10 19.80 21.40

GP 0.10 212547 178.90 1188.08 221.30 177.90 196.40MARICO 0.10 212547 611.30 347.70 889.50 592.80 749.50

Value of PortfolioHigh Value Low Value Closing Value

IPDC 278243.26 211258.77 247327.34ISLAMI BANK 216431.60 193123.58 200337.97PADMALIFE 277978.89 202425.65 230080.99BEXIMCO 300743.78 197723.04 256378.74BATASHOE 158706.67 157266.61 158076.64PADMAOIL 228748.23 217226.01 121948.36AFTABAUTO 254615.60 193315.54 197121.75RDFOOD 278767.59 211478.86 228568.06GP 262921.39 211358.86 233338.28MARICO 309276.13 206114.55 260598.60

2566433.12 2001291.46 2133776.73

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Quarter 4


Initial Price

No. of Shares

High Low Closing

IPDC 0.10 213377.67 19.20 11113.42 72.70 54.80 61.80ISLAMI BANK

0.10 213377.67 36.10 5910.74 37.40 33.10 34.60

PADMALIFE 0.10 213377.67 161.40 1322.04 183.00 150.00 171.50BEXIMCO 0.10 213377.67 721.20 295.86 749.90 615.30 690.00BATASHOE 0.10 213377.67 263.45 809.94 237.00 232.80 235.00PADMAOIL 0.10 213377.67 208.50 1023.39 335.10 351.10 339.30AFTABAUTO 0.10 213377.67 98.40 2168.47 113.00 86.70 93.40RDFOOD 0.10 213377.67 21.40 9970.92 29.40 21.40 27.00GP 0.10 213377.67 196.40 1086.44 215.30 196.60 210.00MARICO 0.10 213377.67 749.50 284.69 894.80 737.80 894.80

Value of Portfolio

Comopany High Value Low Value Closing ValueIPDC 807945.67 609015.44 686809.39ISLAMI BANK 221061.63 195645.46 204511.57PADMALIFE 241933.79 198306.39 226730.30BEXIMCO 221868.99 182045.59 204146.69BATASHOE 191954.86 188553.13 190334.99PADMAOIL 342939.37 359313.67 347237.62AFTABAUTO 245037.37 188006.55 202535.31RDFOOD 293145.03 213377.67 269214.82GP 233911.47 213594.96 228153.32MARICO 254743.62 210046.76 254743.62 Total 3054541.81 2557905.63 2814417.63

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4.6 Scenario 2

100% investment in T-Bill (risky free asset)

91-Day T-Bill RateAuction Date Quarterly Quarterly

31-Dec-13 7.99% 7.99%30-Sep-13 8.65% 8.65%30-Jun-13 8.50% 8.50%

30-Mar-13 9.66% 9.66%

Value of Portfolio

100% risk free Investment

Q 1 Q 2 Q 3 Q 4

T-Bill 1000000 1079900117331

1127304

3 1396019

In case of 100% risk free investment in T-Bill the portfolio value is being compounded in each quarter and thus increasing from quarter to quarter.

4.6 Scenario 250% investment in equity & 50% in T-BillWhen 50% investment is in risky asset and 50% investment in risk free asset then money is

allocated among the stocks equally. In first quarter the 100000 amount of money allocated to

each company is divided by the closing price of last quarter of 2010 to get the no. of shares.

After finding that, there are considered the high, low and closing prices for quarter 1. The final

number of shares is found by adjusting the stock dividend. The portfolio value is found out by

multiplying the no. of shares with the corresponding prices. Thus the closing value at and of 1st

quarter are 427990.04. It will be the amount available for investment for second quarter and the

procedure goes like this for rest 2 quarter. The closing value a of 1st quarter’s risk free asset are

528000.00. It will be the amount available for investment for second quarter and the procedure goes

like this for rest quarters.

Total Amount to be Invested

1,000,000.00

Asset Class Proportion Amount BDTAmount in Risky Asset 50% 500,000.00

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Amount in Risk Free Asset 50% 500,000.00Quarter 1

Risky AssetName Weight Amount to

be InvestedInitial Price No. of

SharesHigh Low Closing

IPDC 0.10 50000 18.10 2762.43 22.10 17.25 22.00ISLAMI BANK

0.10 50000 43.80 1141.55 45.00 39.00 42.10

PADMALIFE 0.10 50000 66.00 757.58 159.00 129.10 130.00BEXIMCO 0.10 50000 64.50 775.19 574.00 480.36 508.70BATASHOE 0.10 50000 524.00 95.42 329.50 325.10 327.23PADMAOIL 0.10 50000 188.40 265.39 198.80 168.00 170.10AFTABAUTO 0.10 50000 85.80 582.75 86.90 67.30 74.50RDFOOD 0.10 50000 25.30 1976.28 31.30 17.90 18.30GP 0.10 50000 172.60 289.69 174.90 141.00 147.30MARICO 0.10 50000 378.00 132.28 412.80 339.90 399.60

Value of Risky Asset

Company High Value Low Value Closing ValueIPDC 61049.72 47651.93 60773.48ISLAMI BANK 51369.86 44520.55 48059.36PADMALIFE 120454.55 97803.03 98484.85BEXIMCO 444961.24 372372.09 394341.09BATASHOE 31440.84 31020.99 31224.24PADMAOIL 52760.08 44585.99 45143.31AFTABAUTO 50641.03 39219.11 43414.92RDFOOD 61857.71 35375.49 36166.01GP 50666.28 40845.89 42670.92MARICO 54603.17 44960.32 52857.14

Total 979804.49 798355.40 853135.31

Risk Free AssetInitial Value 500000.00Ending Value 539950.00

Total Portfolio Value

High Low ClosingTotal Portfolio 1519754.49 1338305.40 1393085.31

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Value

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Quarter 2Risky Asset


Initial Price No. of Shares

High Low Closing

IPDC 0.10 85313.53 22.00 3877.89 22.30 13.21 16.50ISLAMI BANK 0.10 85313.53 42.10 2026.45 43.00 33.90 38.30PADMALIFE 0.10 85313.53 130.00 656.26 159.80 144.50 149.10BEXIMCO 0.10 85313.53 508.70 167.71 589.00 480.30 597.90BATASHOE 0.10 85313.53 327.23 260.71 356.00 345.60 354.23PADMAOIL 0.10 85313.53 170.10 501.55 459.60 168.60 363.40AFTABAUTO 0.10 85313.53 74.50 1145.15 133.10 75.30 106.10RDFOOD 0.10 85313.53 18.30 4661.94 25.50 18.30 19.90GP 0.10 85313.53 147.30 579.18 238.00 147.20 178.90MARICO 0.10 85313.53 399.60 213.50 655.10 385.20 611.30


High Value Low Value Closing ValueIPDC 86476.90 51226.90 63985.15ISLAMI BANK 87137.34 68696.64 77613.02PADMALIFE 104870.02 94829.27 97848.06BEXIMCO 98780.56 80550.60 100273.17BATASHOE 92814.28 90102.85 92352.82PADMAOIL 230512.04 84561.21 182263.00AFTABAUTO 152419.21 86229.65 121500.21RDFOOD 118879.51 85313.53 92772.64GP 137845.35 85255.61 103615.69MARICO 139862.10 82239.17 130510.91

1249597.30 809005.43 1062734.66

Risk Free Asset

Beginning Value 539950.00Ending Value 586655.68

Total Portfolio Value

High Low ClosingTotal Portfolio Value 1836252.97 1395661.11 1649390.34

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Initial Price

No. of Shares

High Low Closing

IPDC 0.10 106273.47 16.50 6440.82 21.60 16.40 19.20ISLAMI BANK

0.10 106273.47 38.30 2774.76 39.00 34.80 36.10


Value of Risky AssetCompany High Value Low Value Closing Value

IPDC 139121.63 105629.38 123663.67ISLAMI BANK

108215.80 96561.79 100168.99

PADMALIFE 138989.44 101212.83 115040.49BEXIMCO 150371.89 98861.52 128189.37BATASHOE 79353.34 78633.30 79038.32PADMAOIL 114374.11 108613.00 60974.18AFTABAUTO 127307.80 96657.77 98560.88RDFOOD 139383.79 105739.43 114284.03GP 131460.69 105679.43 116669.14MARICO 154638.06 103057.27 130299.30

1283216.56 1000645.73 1066888.37

Risk Free AssetBeginning Value 586655.68Ending Value 636521.41

Portfolio ValueHigh Low Closing

Total Portfolio Value 1919737.97 1637167.14 1703409.77

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Initial Price

No. of Shares

High Low Closing

IPDC 0.10 106688.84 19.20 5556.71 72.70 54.80 61.80ISLAMI BANK

0.10 106688.84 36.10 2955.37 37.40 33.10 34.60



High Value Low Value Closing ValueIPDC 403972.83 304507.72 343404.69ISLAMI BANK 110530.82 97822.73 102255.78PADMALIFE 120966.90 99153.19 113365.15BEXIMCO 110934.50 91022.80 102073.35BATASHOE 95977.43 94276.57 95167.50PADMAOIL 171469.68 179656.84 173618.81AFTABAUTO 122518.68 94003.27 101267.66RDFOOD 146572.51 106688.84 134607.41GP 116955.74 106797.48 114076.66MARICO 127371.81 105023.38 127371.81

1527270.90 1278952.82 1407208.82

Risk Free Asset

Initial Value 636521.41Ending Value 698009.38

Portfolio Value


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4.7 Scenario 4Static 50% Investment in Equity & 50% in T-BillRe-allocation Schedule

Re-allocation Proportion Stock 50% T-Bill 50% Before Re-allocation 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Stock 853135.31 867670.13 815406.47 1118945.70 T-Bill 539950.00 756793.59 881271.57 930288.57 Total 1393085.31 1624463.72 1696678.04 2049234.27After Re-allocation Stock 696542.65 812231.86 848339.02 1024617.14 T-Bill 696542.65 812231.86 848339.02 1024617.14 Total 1393085.31 1624463.72 1696678.04 2049234.27


Name Weight

Amount to be Invested

Initial Price

No. of Shares

High Low Closing


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High Value Low Value Closing Value

IPDC 61049.72 47651.93 60773.48ISLAMI BANK 51369.86 44520.55 48059.36PADMALIFE 120454.55 97803.03 98484.85BEXIMCO 444961.24 372372.09 394341.09BATASHOE 31440.84 31020.99 31224.24PADMAOIL 52760.08 44585.99 45143.31AFTABAUTO 50641.03 39219.11 43414.92RDFOOD 61857.71 35375.49 36166.01GP 50666.28 40845.89 42670.92MARICO 54603.17 44960.32 52857.14 979804.49 798355.40 853135.31

Risk Free Asset


Portfolio Value

1519754.49 1338305.40 1393085.31Total Portfolio Value 1519754.49 1338305.40 1393085.31



Initial Price

No. of Shares

High Low Closing


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Value of Risky AssetName High Value Low Value Closing

ValueIPDC 70604.10 41824.22 52240.70ISLAMI BANK 71143.31 56087.40 63367.18PADMALIFE 85621.17 77423.40 79888.08BEXIMCO 80649.42 65765.57 81868.07BATASHOE 75778.26 73564.51 75401.49PADMAOIL 188201.65 69040.03 148808.70AFTABAUTO 124442.72 70402.23 99198.89RDFOOD 97059.22 69654.27 75744.26GP 112543.89 69606.98 84597.07MARICO 114190.46 67144.20 106555.69 1020234.20 660512.80 867670.13

Risk Free Asset

Initial Value 696542.65Ending Value

756793.59

Portfolio Value

High Low ClosingTotal Portfolio Value

1777027.79 1417306.39 1624463.72

Quarter 3

Risky Asset


Initial Price

No. of Shares

High Low Closing


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Value of Risky Asset Company High Value Low Value Closing ValueIPDC 106328.53 80730.92 94514.25ISLAMI BANK 82707.68 73800.70 76557.62PADMALIFE 106227.51 77355.42 87923.69BEXIMCO 114926.94 75558.35 97973.18BATASHOE 60648.54 60098.23 60407.78PADMAOIL 87414.39 83011.26 46601.64AFTABAUTO 97299.41 73874.06 75328.57RDFOOD 106528.90 80815.03 87345.54GP 100473.40 80769.17 89168.44MARICO 118187.51 78765.10 99585.76 980742.81 764778.24 815406.47

Risk Free Asset

Initial Value 812231.86Ending Value

881271.57

Portfolio Value




Initial Price

No. of Shares

High Low Closing


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Value of Risky Asset High Value Low

ValueClosing Value

IPDC 321220.04 242130.10 273059.12ISLAMI BANK 87888.86 77783.99 81308.95PADMALIFE 96187.14 78841.92 90142.59BEXIMCO 88209.85 72377.01 81163.88BATASHOE 76316.70 74964.25 75672.68PADMAOIL 136344.56 142854.59 138053.44AFTABAUTO 97421.05 74746.94 80523.24RDFOOD 116547.51 84833.90 107033.43GP 92997.65 84920.29 90708.35MARICO 101280.02 83509.61 101280.02 1214413.3

81016962.

611118945.70

Risk Free Asset


Portfolio Value


4.8 Dynamic allocationIn this strategy, the manager replicates an option through continuously revising the proportions

of a portfolio consisting of the underlying asset (stock/bond) and the risk less asset (bond/T-bill)

to insure portfolio’s value. This strategy requires buying more stock when the market is going up

and selling off some stock as the market goes down. The proportions allocated to the underlying

risky asset & the risk less asset change every period, so this strategy requires a significant

amount of trading. The no. of units of the underlying risky asset that must be held long at any

given moment will be given by the call option’s “Delta”. The amount of risk less asset to hold is

determined by subtracting the value of the units held in the underlying asset from the total value

of the insured portfolio.

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AssumptionsIn this analysis there have to invest in securities considering the market scenario. It was not

possible to apply our theoretical knowledge in practical applications in rigid and structured

form .For simplicity I have taken some assumptions for analytical purpose:

Total amount of investment at the initial period is BDT 1000000 and the distribution

initially is 50% of our total fund in equity and rest 50% in T-Bills.

The fund will be equally distributed among ten securities.

There are considered T- Bill as risk free asset

Time period is considered as quarterly

Initial Investment

T-Bill BDT 500000

Investment in Stock BDT 500000

Total Amount BDT 1000000

The amount of equity will be equally distributed among ten securities.

DeltaDelta is the no. of shares that an investor will buy for each option shorted. So here delta will

determine how much to buy/sell in equity securities and T-Bill.

Delta = (Insured Value in High - Insured Value in Low)/ (100% in risky asset in high -

100% in risky asset in low)

Time Period 0

100% Risky Asset 1,000,000.00 Insured Portfolio 1000000.00Equity 500000.00 T-Bill 500000.00 Delta 0.50 New Portfolio Equity 500000.00 T-Bill 500000.00 Total 1000000.00

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So, here the table defines the picture for first period. The initial delta was 0.35 while it has

reduced to 0.70 in quarter 1. So, this difference amount of shares is sold. With the money

provided by selling off the equity is used to buy T-Bill. The ultimate portfolio is found out by

subtracting sold amount of shares from initial shares and adding the new amount of T-Bill to

initial T-bill.

1st Quarter

100% Risky Asset 853135.31 Insured Portfolio 966517.65Equity 426567.65 T-Bill 539950.00 Delta 0.70 Buy Share 169004.07 Sell T-Bill 169004.07 New Portfolio Equity 595571.73 T-Bill 370945.93 Total 966517.65

The table defines the picture for second period. The delta has decreased to 0.45 in quarter 2. So,

this difference amount of shares is sold. To buy the T-bill we need money and this money is

provided by selling off this amount of shares. The ultimate portfolio is found out by adding

bought amount of T-bill to initial shares and subtracting the sold amount of Shares from initial

amount share.

100% Risky Asset 708153.15 Insured Portfolio 886078.93Equity 494360.03 T-Bill 391718.90 Delta 0.45 Sell Share 176493.1198 Buy T-Bill 176493.1198 New Portfolio

Equity317866.910

6

T-Bill568212.017

6 Total 886078.93

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So, here the table defines the picture for third period. . The delta has increased to 0.77 in quarter

3. So, this difference amount of shares is bought. To buy the shares we need money and this

money is provided by selling off this amount of T-Bill. The ultimate portfolio is found out by

adding bought amount of shares to initial shares and subtracting the sold amount of T-Bill from

initial T-bill.

3rd Quarter

100% Risky Asset 698649.25 Insured Portfolio 921587.78Equity 313600.92 T-Bill 607986.86 Delta 0.77 Buy Share 221265.08 New Portfolio Sell T-Bill 221265.08 Equity 534866.00 T-Bill 386721.78 Total 921587.78

The table defines the picture for second period. The delta has decreased to 0.48 in quarter 4. So,

this difference amount of shares is sold. To buy the T-bill we need money and this money is

provided by selling off this amount of shares. The ultimate portfolio is found out by adding

bought amount of T-bill to initial shares and subtracting the sold amount of Shares from initial

amount share.

100% Risky Asset 605732.97 Insured Portfolio 881584.82Equity 463731.94 T-Bill 417852.88 Delta 0.48 Closing Portfolio Equity 463731.94 T-Bill 417852.88 Total 881584.82

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Chapter FiveFindings and Conclusion

5.1 Findings

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5.2 Conclusion

In each period when the equity value is increasing, the delta is increasing and when the equity

value is decreasing, the delta is decreasing. It indicates that dynamic allocation strategy has quite

successfully captured the stock price movement,

Any violation of such behavior may be related to sudden change in market or effect of multiplier,

An investor must look for every possible situation before engaging in dynamic asset allocation.

Dynamic asset allocation includes a zero-coupon bond and an underlying investment. Assets are

dynamically shifted between these two components depending largely on the performance of the

underlying investments, and based on some.

In some cases, certain products can use a borrowing facility to enhance exposure if the

underlying investments experience strong returns. If the underlying investments decline in value,

CPPI automatically deleverages, reducing exposure in falling markets.

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http://en.wikipedia.org/wiki/Zero-coupon_bond

References

Websites

o Dhaka Stock Exchanges, www.dsebd.orgo Bangladesh Bank, www.cse.com.bd

Persons

o Dr. Mahmod Osman Imam, Professor, Department of Finance, University of Dhaka.

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205817522 dynamic-asset-allocation

Education