Dynamic Asset Allocation
Content
“DYNAMIC ASSET ALLOCATION STRATEGY”
Course Code: F-503 Course Code: Deriv !ives
Su"#i!!ed To
Dr. Mahmod Osman Imam Professor of Finance Department of Finance University of Dhaka
Su"#i!!ed $%
Golam Ruhani MB !"th Batch MB Roll #o$ !"%&'( BB Roll$ !"%!') Department of Finance Faculty of Business *tudies University of Dhaka
D !e o& Su"#issio': (!) Fe"ru r%* +0,-
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Letter of Transmittal
Fe+ruary ), '(!-
Dr. Mahmod Osman Imam Professor of Finance Department of Finance University of Dhaka Dear *ir, It is my immense pleasure to su+mit my class report as you asked me to prepare and su+mit as a re.uirement of Financial Derivatives course /F%"(01 on 2 Dynamic sset llocation strate3y 2. I have tried my +est to compile the pertinent information as comprehensively as possi+le and if you need any further information, I 4ill +e o+li3ed to assist you.
5hankin3 you, Golam Ruhani MB !"th Batch MB Roll #o$ !"%&'( BB Roll$ !"%!') Department of Finance Faculty of Business *tudies University of Dhaka
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ACKNOWLEDGEMENTS
t first I 4ould like thank our course teacher Dr. Mahmod Osman Imam for 3ivin3 us such an important 6o+ like mana3in3 the portfolio insurance usin3 dynamic asset allocation strate3y. Durin3 the preparation of the report 4e did have some pro+lem that has +een erased out 4ith your propound lecture and assistance. 7ithout your cooperation and 3uideline this report 4ould have +een an incomplete one. Finally thank you for your supportive thou3ht and kind consideration for formulatin3 an idea.
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EXECUTIVE SUMMARY
5his report 8Dynamic sset llocation *trate3y 2 is prepared to fulfill the partial re.uirement of Financial Derivatives course /F%"(01 of MB Pro3ram of University of Dhaka. 5he o+6ective of this report is to find out ho4 e.uity risk can +e mana3ed /either eliminated or reduced1 throu3h dynamic asset allocation. 5his report discusses the 4ays of handlin3 the risk arisin3 from holdin3s of portfolio of risky assets and riskless assets that means ho4 to mana3e insured portfolio 4hich is a hed3in3 techni.ue fre.uently used +y institutional investors 4hen the market direction is uncertain or volatile. Portfolio insurance is a dynamic tradin3 strate3y desi3ned to protect a portfolio from market declines 4hile preservin3 the opportunity to participate in market advances. *everal portfolio insurance methods e9ist and are used in practice. 5he +est kno4n strate3y involves tradin3 in :real; and < or :synthetic; options. For some reasons, most investors prefer not to use the option market for insurin3 the portfolio. =ence it calls for the dynamic tradin3 strate3y replicatin3 the option strate3y to insure the portfolio. In this strate3y, the mana3er replicates an option throu3h continuously revisin3 the proportions of a portfolio consistin3 of the underlyin3 risky asset /stock<+ond1 and the riskless asset /+ond<5%+ill1 to insure portfolio;s value. In this report I have to analy>e the industry and company to select the securities to invest. First I construct t4o portfolios one investin3 !((? in e.uity another investin3 "(? in e.uity and "(? in +onds. 5otal amount of investment is ",((,((( taka. nd assumed +ond rate 4as @?. fter static approach I found out Delta. Delta tells us the num+er of shares to +e hold to hed3e the portfolio. Delta is the differences +et4een hi3her and lo4er value of "(? e.uity investment divided +y the differences +et4een hi3her and lo4er value of !((? e.uity investment. =ere I assume that there is a A(? chance to reali>e the hi3her value and )(? chance to reali>e the lo4er value. 5hen I assi3n the portfolio accordin3 to delta and find out the insured value.
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Overview of Dynamic Asset allocation
Asset allocation-a new dimension to portfolio performance
Different persons have different portfolio mana3ement needs, some 4ant to ma9imi>e the return, some 4ant to minimi>e risks 4ith steady investment 3ro4th, some 4ant constant earnin3s, and some others 4ant to earn more spendin3 least time. Dynamic asset allocation is one such portfolio mana3ement strate3y 4hich aims at ma9imi>in3 the portfolio return +y active mana3ement of portfolio components. 5o construct an asset allocation portfolio, one invests amon3 various asset classes, such as stocks, +onds, cash and others. 5he returns of the asset classes tend to +e affected +y different factors and thus, face different risks. Bsta+lishin3 an appropriate asset mi9 is a dynamic process, and it plays a key role in determinin3 portfolio;s overall risk and return. very important asset allocation strate3y is dynamic asset allocation, 4ith 4hich investor constantly ad6usts the mi9 of assets as markets rise and fall and the economy stren3thens and 4eakens. Unlike t4o other popular portfolio mana3ement strate3ies, strate3ic and tactical asset allocations strate3ies, dynamic asset allocation does not involve keepin3 a fi9ed investment ratio. Dynamic investors diversify their investments +y investin3 in e.uities, mutual funds, inde9 funds, currencies, derivatives and fi9ed income securities. 5hey +uy instruments 4hich are risin3 /or are predicted to rise1 and they sell instruments 4hich are fallin3 /or are predicted to fall1. lthou3h not common, many dynamic investors keep a reasona+le proportion +et4een hi3h%return<hi3h%risk instruments such as stocks and lo4%return<lo4%risk instruments such as treasury +onds. Bvaluation of current trends and prediction of future trends on investments are very important 4ith dynamic asset allocation. Investors can use a ran3e of technical and fundamental analysis tools for this purpose. *uccessful dynamic investors are those 4ho make ri3ht +uy and sell decisions at ri3ht time. 5here are a fe4 different strate3ies of esta+lishin3 asset allocations, and there are outlined some of them and e9amined their +asic mana3ement process.
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S!r !e.i/ Asse! A00o/ !io' *trate3ic asset allocation is a method that esta+lishes and adheres to 4hat is a C+ase policy mi9C. 5his is a proportional com+ination of assets +ased on e9pected rates of return for each asset class. For e9ample, if stocks have historically returned !(? per year and +onds have returned "? per year, a mi9 of "(? stocks and "(? +onds 4ould +e e9pected to return @."? per year. Co's! '!-1ei.)!i'. Asse! A00o/ !io': *trate3ic asset allocation 3enerally implies a +uy%and%hold strate3yD even as the shift in the values of assets causes a drift from the initially esta+lished policy mi9. For this reason, may choose to adopt a constant%4ei3htin3 approach to asset allocation. 7ith this approach, portfolio can +e re+alanced. For e9ample, if one asset 4ere declinin3 in value, 4ould +e purchase more of that asset, and if that asset value should increase, 4ould sell it. 5here are no hard%and%fast rules for the timin3 of portfolio re+alancin3 under strate3ic or constant%4ei3htin3 asset allocation. =o4ever, a common rule of thum+ is that the portfolio should +e re+alanced to its ori3inal mi9 4hen any 3iven asset class moves more than "? from its ori3inal value. T /!i/ 0 Asse! A00o/ !io' Over the lon3 run, a strate3ic asset allocation strate3y may seem relatively ri3id. 5herefore, it may necessary to occasionally en3a3e in short%term, tactical deviations from the mi9 in order to capitali>e on unusual or e9ceptional investment opportunities. 5his fle9i+ility adds a component of market timin3 to the portfolio, allo4in3 you to participate in economic conditions that are more favora+le for one asset class than for others. 5actical asset allocation can +e descri+ed as a moderately active strate3y, since the overall strate3ic asset mi9 is returned to 4hen desired short% term profits are achieved. I'sured Asse! A00o/ !io' 7ith an insured asset allocation strate3y, esta+lish a +ase portfolio value under 4hich the portfolio should not +e allo4ed to drop. s lon3 as the portfolio achieves a return a+ove its +ase, try to increase the portfolio value as much as possi+le. If, ho4ever, the portfolio should ever drop to the +ase value, invest in risk%free assets so that the +ase value +ecomes fi9ed.
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I'!e.r !ed Asse! A00o/ !io' 7ith inte3rated asset allocation there are considered +oth economic e9pectations and your risk in esta+lishin3 an asset mi9. Inte3rated asset allocation, on the other hand, includes aspects of all strate3ies, accountin3 not only for e9pectations +ut also actual chan3es in capital markets and risk tolerance. D%' #i/ Asse! A00o/ !io' nother active asset allocation strate3y is dynamic asset allocation, 4ith 4hich investor constantly ad6usts the mi9 of assets as markets rise and fall and the economy stren3thens and 4eakens. 7ith this strate3y investor sell assets that are declinin3 and purchase assets that are increasin3, makin3 dynamic asset allocation the polar opposite of a constant%4ei3htin3 strate3y. For e9ample, if the stock market is sho4in3 4eakness, one sell stocks in anticipation of further decreases, and if the market is stron3, one purchase stocks in anticipation of continued market 3ains.
Importance of dynamic asset allocation
num+er of factors make dynamic asset allocation a via+le strate3y$ • The cyclical moves of financial markets:
Over a century of market history has clearly sho4n that dissimilar investment cate3ories +ehave differently at different times in the economic cycle. 5he dynamic asset allocation;s challen3e is to use technical and<or fundamental analysis to attempt to identify 4here the cycle are e9isted and 4hat investment cate3ories appear to have the stron3est potential for appreciation. • Increase in returns utilizing efficient investing decision:
5his is a key reason that dynamic asset allocators do not have to +e !((? ri3ht to produce hi3her risk%ad6usted returns. It is not uncommon for top%performin3 sectors to e9perience advances of "(? or more annually. 7hile the do4nside risk of some market sectors makes investin3 in these areas potentially dan3erous in a fi9ed asset allocation strate3y, dynamic asset allocation can harness their positive features and ener3i>e investor portfolios.
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Efficiency of the strategy with mutual funds:
Usin3 mutual funds in a dynamic asset allocation strate3y further reduces risk +y providin3 instant diversification across hundreds of securities 4ithin each asset class and allo4in3 investors to move assets overni3ht +et4een funds 4ith little or no cost. • Existence of ear markets:
Properly implemented, a dynamic asset allocation strate3y should lessen an investorCs e9posure to declinin3 markets, +luntin3 the impact of +ear markets and preservin3 capital the ma6ority of prior 3ains. 5he more investors lose money in a do4n market, the more they lose valua+le time and opportunity. • Importance of technology:
Eomputers and on%line data+ases have 3iven investment mana3ers po4erful tools for analy>in3 the market and developin3 comple9 dynamic allocation models. By +ack testin3 these models a3ainst historical data, dynamic asset allocators have developed parameters and models, 4hich indicate the asset classes that appear to +e in sustained up4ard trends and should surpass other investments in the current market climate. Given a 4orkin3 kno4led3e of the markets and cycles, todayCs allocator can track a multitude of indicators to determine 4hat people are doin3 in the market and 4hich actions or data si3nal a fundamental chan3e in economic climate. fter 4ei3hin3 the attractiveness of different asset classes, the money mana3er develops an asset allocation strate3y, 4hich distri+utes monies amon3 different funds<asset classes +ased on return pro+a+ilities. 7hen the asset allocation model indicates chan3es in the attractiveness of an asset class, monies are moved to different funds.
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!oals of dynamic asset allocation
Redu/i'. ris2 3 /)ievi'. )i.)er ris2 d4us!ed re!ur'
5he o+6ective of dynamic asset allocation is to reduce the risk or fluctuation in the value of an investorCs account 4hile achievin3 hi3her returns than other investments 4ith similar risk. 5he success of a dynamic asset allocation approach depends upon the a+ility of the investment advisor to identify those asset classes achievin3 the hi3hest returns in each market phase. #ot every investment decision 4ill +e perfect, +ut over a full market cycle, a dynamic asset allocation approach offers the potential for superior risk%ad6usted results, outperformin3 the impact of ta9es and inflation, and leavin3 the investor 4ith real 3ro4th.
Redu/i'. ris2 5i!)ou! s /ri&i/i'. 6er&or# '/e
Dynamic asset allocation, like a 2fi9ed2 asset allocation strate3y, seeks to reduce risk throu3h diversification amon3 different investment cate3ories. Usin3 dynamic asset allocation, ho4ever, the investor selects or 4ei3hts investments +ased on those cate3ories 4ith the 3reatest potential for superior returns, 3iven current market conditions. 5he allocation of assets +ecomes dynamic %% chan3in3 in response to market conditions and perceived opportunities for profit. In studies of the performance of money mana3ers, asset allocation decisions, rather than individual stock selection, have +een sho4n to account for )( to A(? and more of a portfolioCs performance. 5op performin3 mana3ers are those 4ho are invested in the +est performin3 asset classes durin3 different periods of the market.
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enefits of dynamic asset allocation
5he practice of dynamic asset allocation /also called tactical or active asset allocation1 has 3ro4n in recent years due to the success of various computeri>ed market%timin3 techni.ues in analy>in3 market trends. 5hese ne4 technolo3ies typically do not predict future market movements as much as they identify chan3es in trend direction and evaluate the risk of chan3es in a trend. 7ith this advanced technolo3y, the asset allocation practitioner can respond dynamically to the market and si3nificantly increase risk%ad6usted return over time +y$
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voidin3 +ear markets and periods of under%performance in the various asset classes%%either +y reducin3 or eliminatin3 the allocation of the under% performin3 asset /e.3., 3ettin3 out of the market1.
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Increasin3 the allocation of asset classes currently in +ull markets that are over%performin37 Dynamic asset allocation eliminates the key 4eakness found in the traditional, fi9ed approach that routinely allo4s periods of under%performance. 5he portfolio mi9 of our 3eneric Model Portfolios 4ill shift dynamically over time to avoid periods of under%performance and move into investment types that are performin3 4ell. 5he net effect is reduced losses, lo4er volatility, hi3her avera3e returns and a much stron3er risk%ad6usted return.
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Dynamic approaches to asset allocation are inherently more efficient than the traditional, fi9ed approach. 5hey can si3nificantly +oost returns over time +y .uickly reactin3 to chan3in3 market conditions for various asset classes and sectors, capturin3 periods of over%performance and avoidin3 periods of under%performance.
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"ynamic trading strategy: #ortfolio Insurance
Portfolio insurances a dynamic tradin3 strate3y desi3ned to protect a portfolio from market declines 4hile preservin3 the opportunity to participate in market advances. *everal portfolio insurance methods e9ist and are used in practice. 5he +est%kno4n strate3y involves tradin3 in 8realF or 8syntheticF options. 7ith the introduction of e9chan3e%traded inde9 put options, it seemed theoretically possi+le for an investor to use these contracts to insure 4ell%diversified portfolios, especially inde9 funds. For some reasons, most investors prefer not to use the option market for insurin3 the portfolios. =ence it calls for the dynamic tradin3 strate3y replicatin3 the option strate3y to insure the portfolio. In this strate3y the mana3er replicates an option throu3h a process of continually revisin3, in a prescri+ed manner, the proportions of a portfolio consistin3 of the underlyin3 the asset and the risk%less asset. Besides, the comple9 nature of the underlyin3 option pricin3 theory , the dynamic strate3y calls for +uyin3 more stock 4hen the market is 3oin3 up and sellin3 off some stock as the market 3oes do4n. 5he +asic dynamic tradin3 approach involves replicatin3 the insured portfolio;s price 4ith an ever%chan3in3 com+ination of positions in the underlyin3 portfolio and the risk less asset. 5he proportions allocated to the underlyin3 portfolio and the risk less asset chan3e every period, so that the dynamic insurance strate3y re.uires a si3nificant amount of tradin3. 7e 4ill see in the report that ho4 the same replication is accomplished /appro9imately1 4ith either a stock portfolio and short futures positions or the risk less futures. 5he num+er of units of the underlyin3 portfolio that must +e held lon3 at any 3iven moment 4ill +e 3iven +y the call option;s 8deltaF, the reciprocal of ho4 many calls it takes to hed3e a unit of the underlyin3 portfolio. 5he call delta tells us the num+er of units of the underlyin3 portfolio to hold. 5he amount of the risk less asset to hold is determined +y su+tractin3 the value of the held units of the underlyin3 portfolio from the total value of the insured portfolio.
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Application Of Dynamic Asset Allocation $tatic allocation
5his part has +een done in ' parts% static allocation and dynamic allocation. In doin3 the static asset allocation, - scenarios are considered namely% • !((? Investment in B.uity portfolio i.e. Risky Portfolio. • !((? Investment in 5 G Bill i.e. Risk free portfolio. • "(? % "(? investment in B.uity and 5 G Bill /Eonstant 4ei3ht1 • *tatic "(? % "(? investment in B.uity and 5 G Bill 5he stocks have +een selected from Dhaka *tock B9chan3e /D*B1. *tocks are selected from five different industries 4ith the cyclical and counter%cyclical nature of +usiness for diversification. 5here are considered 5% Bill as risk free asset and there are also considered A! days 5% Bill rate.
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ssumptions$ mount to +e invested is !(((((( tk. Investment hori>on is one year. Portfolios are e.ually 4ei3hted after every .uarter. #um+ers of shares to +e invested are determined 4ith closin3 price of last .uarter. 7hen !((? investment is in risky asset, then money is allocated amon3 the stocks e.ually. In first .uarter the '((((( amount of money allocated to each company is divided +y the closin3 price of last .uarter of '(!( to 3et the no. of shares. fter findin3 that, there are considered the hi3h, lo4 and closin3 prices for .uarter !. 5he final num+er of shares is found +y ad6ustin3 the stock dividend. 5he portfolio value is found out +y multiplyin3 the no. of shares 4ith the correspondin3 prices. 5hus the closin3 value at and of !st .uarter are (55<(070(. It 4ill +e the amount availa+le for investment for second .uarter and the procedure 3oes like this for rest ' .uarters.
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%ame
Amount to &e Invested '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()((
SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
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%ame *eight Amount to &e Invested '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( Initial #rice '-).( 2')0( 3/)0( '4)4( '.2)(( '11).( 1/)1( 3/)2( '43)0( 241)(( %o) of $hares /'/.)0. 2'0.)/0 2-(0)3/ /0.-)43 0--)2( /2()4''0/)/( 2-/3)/4 /4-)24 30.)// +igh Low ,losing
SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'(
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'/)(( 3.).( 3')1( '/).( '2()(( '4()'( 4.)/( '1)2( '.4)2( 2--)0(
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SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
+igh 5alue -.23-)-( 1-//0)-0 '(2-(0)3/ '(2-/.)1( ''''11)1' '(//3()'4 '('313)(/ '324'/).3 '('223)/0 '(-3(0)2/ '(.2--2)34 Low 5alue 40311)00 '3030/)13 1'0.()02 1'-3()-( -(.'-)/1 1-'4')-4 41.21)32 4(4/()-1'0-')44 1--3()02 100/(-)',losing 5alue 442'-)/443'/)'1/'/0)3/ 14((/)0/ -(-(-)(-(310)03 1013-)1. 43223)(3 1/2.')12 '(/4'.)31/1''()20
13
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14
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%ame $I L 6L, 76*A%!788 " A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 *eight ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( Amount to &e Invested '(0124 '(0124 '(0124 '(0124 '(0124 '(0124 '(0124 '(0124 '(0124 '(0124 Initial #rice '3)/( 3/)(( 32)'( '/)2( '.-)'( 202).( '(0)'( '-)-( '41)-( 0'')2( %o) of $hares 1/.0)4 .342). 1 .03.)1 0-13)1 3 4'0)// 3-2)-'((0)/ /201)4 ( /-4)''4.)44 +igh '.).( 30)1( 31)'( 3.)/( '-/)(( 2-')'( '34)'( 30)'( 33')2( 11-)/( Low '()4( 2')1( 3')-( '/)'( '.3)(( 24').( -0)/( '-)1( '44)-( /-3)1( ,losing '.).( 3.)1( 33)'( '4)(( '0').( 3(1)/( -1).( 3').( '-0).( 4.-)/(
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15
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'212'01)'1
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'2(-.24)24
16
S/e' rio + ,008 i'ves!#e'! i' T-$i00 :ris2% &ree sse!;
!((? risk free$ 5%Bill Investment H!
1079900
H'
117331 1
H0
1273043
H139601 9
1000000
In case of !((? risk free investment in 5%Bill the portfolio value is +ein3 compounded in each .uarter and thus increasin3 from .uarter to .uarter.
S/e' rio 3 508 i'ves!#e'! i' e9ui!% 3 508 i' T-$i00
7hen "(? investment is in risky asset and "(? investment in risk free asset then money is allocated amon3 the stocks e.ually. In first .uarter the !((((( amount of money allocated to each company is divided +y the closin3 price of last .uarter of '(!( to 3et the no. of shares. fter findin3 that, there are considered the hi3h, lo4 and closin3 prices for .uarter !. 5he final num+er of shares is found +y ad6ustin3 the stock dividend. 5he portfolio value is found out +y multiplyin3 the no. of shares 4ith the correspondin3 prices. 5hus the closin3 value at and of ! st .uarter are -'@AA(.(-. It 4ill +e the amount availa+le for investment for second .uarter and the procedure 3oes like this for rest ' .uarter. 5he closin3 value a of !st .uarter;s risk free asset are "')(((.((. It 4ill +e the amount availa+le for investment for second .uarter and the procedure 3oes like this for rest .uarters.
-'-"ay T- ill ;ate: <uarterly Au !"#$ D%!& 4)--= 31'D& '13 1)0/= 30'S&('13 1)/(= 30')u$'13 -)00= 30'M%*'13 <uarterly 4)--= 1)0/= 1)/(= -)00=
17
=u r!er , Ris2% Asse!
%ame $I L 6L, 76*A%!788 " A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 *eigh t ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( Amount to &e Invested /(((( /(((( /(((( /(((( /(((( /(((( /(((( /(((( /(((( /(((( Initial #rice '-).( 2')0( 3/)0( '4)4( '.2)(( '11).( 1/)1( 3/)2( '43)0( 241)(( %o) of $hares 3/44)2 3 '/13)3 1 '-/2)' 2 313.)1 0 2.-)0/ 30/)2/13)4/ '-40)3 1 31-)0'23)31 +igh '1)2( 31)2( 30)0( '1).( '/-)( ( '-1)1 ( 10)-( 2')2( '4.)( .'3)1 ( Low '.)1( 2-)-( 3()-( '.)/( '3-)2( '01)(( 04)2( '4)-( '.')(( 22-)-( ,losin g '/)(( 3.).( 3')1( '/).( '2()(( '4()'( 4.)/( '1)2( '.4)2( 2--)0
? 0ue o& Ris2% Asse!
$I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 +igh 5alue .4'0.)-/ ..441).1 /'-/2)'2 /'-44).( ///-.).' /340()(1 /(0.')(2 0'1/4)4' /(000)31 /.0(2)'4 /3'--0)02 Low 5alue 21'..)22 02'23)-' .(13()2' .(-0()./ ./3(-)4../1/)-2-3'-)'' 2/24/)..(1./)1..-0()23 .223/.)0( ,losing 5alue 210/-)4210(4)/.3/41)'2 .2/(3)13 ././.)// ./'.2)2' .2.'.)-3 20'00)(' .304()-3 /31/4)'. .3-(//)'1
Ris2 Free Asse!
Initial 5alue Ending 5alue /((((()(( /2--/()((
>or!&o0io ? 0ue
Total #ortfolio 5alue +igh '(0'-.0)02 Low -423(.)0( ,losing -0-((/)'1
18
19
=u r!er + Ris2% Asse!
Amount to &e Investe d .3-(0 .3-(0 .3-(0 .3-(0 .3-(0 .3-(0 .3-(0 .3-(0 .3-(0
%ame $I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !#
*eight ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'(
Initial #rice '/)(( 3.).( 3')1( '/).( '2()(( '4()'( 4.)/( '1)2( '.4)2(
%o) of $hares 310()24 '4/1).3 '-01)'. 3410)(4 22()(. 3/3)3. /4/)-' 32..)/0 3-')31
+igh '4)4( 3/)'( 2')3( '4)-( '/-)1 ( ./-)0 '22)' ( 3/)/( 321)(
Low '3)/( 23)(( 3')3( '/)'( './)/ '01)0 4/)2( '1)2( '.4)3
,losing '3)/( 3/)(( 32)'( '/)2( '.-)'( 202).( '(0)'( '-)-( '41)-(
? 0ue o& Ris2% Asse!
SI$L CLC FC1ANGFOOD ADID>I>ES ACI >ADMAOIL AFTA$ACTO RDFOOD G> MARICO @i.) ? 0ue 50A+(75, --,3A7-, A,-0A70A -<(B07B0 5+B-07B( ,,5<+(7,BAA5-70+ 5<B(A73( A<3+-7A0 B033(7(5 A50(,-7-5 Lo5 ? 0ue 35B5-7A0 5A+A<753 -,B+-7A3 -+0A<7B0 -(0+,7,( -+5+B7,A -33AA7+5 -+<0575+ -+(BA73< -,35<73B -3A(B-733 C0osi'. ? 0ue 35B5-7A0 -3<A075B -5-A-7,0 -+A+A7<, -<+0<733 <,AA+7<A,,0-73B -AA5A7(+ 5+,0<7<A A5A357<< 53-,(575<
Ris2 Free Asse!
Initial 5alue Ending 5alue /2--/()(( /100//)01
>or!&o0io ? 0ue
+igh Total #ortfolio 5alue '324.4()'2 Low '(32/2()(( ,losing ''3(1.')34
20
=u r!er 3 Ris2% Asse!
%ame *eight Amount to &e Investe d /2.'/2.'/2.'/2.'/2.'/2.'/2.'/2.'/2.'Initial #rice %o) of $hares +igh Low ,losing
$I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !#
()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'(
'3)/( 3/)(( 32)'( '/)2( '.-)'( 202).( '(0)'( '-)-( '41)-(
.342).1 3'20)4. 32'3).2.-').' 2/1)34 '.4)(( /(2).4 301.)2/ 3-1)/-
'.).( 30)1( 31)'( 3.)/( '-/)( ( 2-')' ( '34)' ( 30)'( 33')2 (
'()4( 2')1( 3')-( '/)'( '.3)( 24'). -0)/( '-)1( '44)-
'.).( 3.)1( 33)'( '4)(( '0').( 3(1)/( -1).( 3').( '-0).(
? 0ue o& Ris2% Asse!
@i.) ? 0ue SI$L CLC FC1ANGFOOD ADID>I>ES ACI >ADMAOIL AFTA$ACTO RDFOOD G> MARICO
0'/21)'1 /430.)4( 0.-1')(3 1//2-)/3 0-102)2' /4.-()20 02--')/' 4((0')/2 00(41)-4 4443-)'3 04./21)3'
Lo5 ? 0ue
./430)304-.1).' /(0.2)/4 /343()31 /(14.)13 /./-.)/2 .1/1/)3' /2'/()'3 /2''-)-0 /'1(')-2 /3-'0/)'2
C0osi'. ? 0ue
0'/21)'1 /3--')3' /''(0)(4 /-2/2)-/ /413/)23 2(0.1)4.-/.')1' /4../)(1 /10.2)-0 0/.-/)'/../1-)/4
Ris2 Free Asse!
Initial 5alue Ending 5alue /100//)01 020/3').'
>or!&o0io ? 0ue
Total #ortfolio 5alue +igh '2''(/-)0' Low ''0/010)/2 ,losing ''1'''()-1
21
22
=u r!er Ris2% Asse!
%ame $I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 *eight ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( Amount to &e Invested /..//..//..//..//..//..//..//..//..//../Initial #rice '.).( 3.)1( 33)'( '4)(( '0').( 3(1)/( -1).( 3').( '-0).( 4.-)/( %o) of $hares 241')1 4 3'-/)2 3.0.)3 ' 23(2). 4 224).3 30')'//2).. 3/..)1 ' 344)343)00 +igh '/)'( 24)2( 30)/( 32)4( '12)( ( 22/)' ( ''2)( ( 3-).( 3'/)2 ( 1-.)1 ( Low '3)1( 31)3( 33)'( '0)-( '/()( ( 2/')' ( 10)4( 3').( '-0)0 ( 424)1 ( ,losing '/)(( 2/)'( 32)2( 33)-( '4')/( 22-)2( -2).( 34)(( 3'()(( 1-.)1(
? 0ue o& Ris2% Asse!
@i.) ? 0ue SI$L CLC FC1ANGFOOD ADID>I>ES ACI >ADMAOIL AFTA$ACTO RDFOOD G> MARICO
/4'(0)34 1'-(1)(2 0/2(').0 4/-33)'0'4.4)'. 14/30)'3 03/2-)3/ 4.1'4)./ /-0--)00 0/('0)/' 0-'/1.)(-
Lo5 ? 0ue
.1.(4)-0 0'-3/)'( /../1)-0 /.'21)0' /(0'3).' -'4(/)32 .4-12)0/ /../1)-0 /./'.).' /20(1)12 /4'1'.)'2
C0osi'. ? 0ue
/0431)(1 44(40)-/4.'0)(( 422/-).3 /4100)10 11032)'. /'0-')42 014(-)-( /132()(/ 0/('0)/' 0/.4'1)01
Ris2 Free Asse!
Initial 5alue Ending 5alue 020/3').' 0-1((-)21
>or!&o0io ? 0ue
23
+igh Total #ortfolio 5alue '21-/-2).4
Low '30-132)/'
,losing '2/3431)(0
Scenario 4 S! !i/ 508 I'ves!#e'! i' E9ui!% 3 508 i' T-$i00 Re- 00o/ !io' S/)edu0e
;e-allocation #roportion $tock T- ill efore ;e-allocation $tock T- ill Total After ;e-allocation $tock T- ill Total /(= /(= 'st <uarter .3-(//)'1 /2--/()(( -0-((/)'1 3nd <uarter 0(23'-)'/ /30.'3)(0 ''3-02')33 2rd <uarter /4/1'0)'/ 0'313.)-. ''110.')(.th <uarter 4'./(0)./ 0/'42')-' '200321)2 0 012''-)'1 012''-)'1 '200321)2 0
.1./(3)/.1./(3)/-0-((/)'1
/0.1'/)0' /0.1'/)0' ''3-02')33
/-.23()/. /-.23()/. ''110.')(-
=u r!er , Ris2% Asse!
%ame *eight Amount to &e Invested /(((()(( /(((()(( /(((()(( /(((()(( /(((()(( /(((()(( /(((()(( /(((()(( /(((()(( /(((()(( Initial #rice '-).( 2')0( 3/)0( '4)4( '.2)( ( '11). ( 1/)1( 3/)2( '43)0 ( 241)( %o) of $hares 3/44) '/13)3 '-/2)' 2 313.)1 2.-)0/ 30/)2/13)4/ '-40)3 31-)0'23)31 +igh Low ,losin g '/)(( 3.).( 3')1( '/).( '2()(( '4()'( 4.)/( '1)2( '.4)2( 2--)0(
SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'(
'1)2( 31)2( 30)0( '1).( '/-)(( '-1)1( 10)-( 2')2( '4.)-( .'3)1(
'.)1( 2-)-( 3()-( '.)/( '3-)2 ( '01)( ( 04)2( '4)-( '.')( ( 22-)-
? 0ue o& Ris2% Asse!
+igh 5alue Low 5alue ,losing 5alue
24
$I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8
.4'0.)-/ ..441).1 /'-/2)'2 /'-44).( ///-.).' /340()(1 /(0.')(2 0'1/4)4' /(000)31 /.0(2)'4 /3'--0)02
21'..)22 02'23)-' .(13()2' .(-0()./ ./3(-)4../1/)-2-3'-)'' 2/24/)..(1./)1..-0()23 .223/.)0(
210/-)4210(4)/.3/41)'2 .2/(3)13 ././.)// ./'.2)2' .2.'.)-3 20'00)(' .304()-3 /31/4)'. .3-(//)'1
Ris2 Free Asse!
Initial 5alue Ending 5alue /((((()(( /2--/()((
>or!&o0io ? 0ue
+igh Total #ortfolio 5alue '(0'-.0)02 Low -423(.)0( ,losing -0-((/)'1
=u r!er + Ris2% Asse!
%ame *eight Amount to &e Invested .1./( .1./( .1./( .1./( .1./( .1./( .1./( .1./( .1./( .1./( Initial #rice '/)(( 3.).( 3')1( '/).( '2()(( '4()'( 4.)/( '1)2( '.4)2( 2--)0( %o) of $hares 232()( 3 '-1/)0 4 3333). 2'.0)' 3 243)031.)12 0/()2. 30.4)/ 0 231)-3 '3')3/ +igh Low ,losing
SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'(
'4)4( 3/)'( 2')3( '4)-( '/-)1( ./-)0( '22)'( 3/)/( 321)(( 0//)'(
'3)/( 23)(( 3')3( '/)'( './)/ ( '01)0 ( 4/)2( '1)2( '.4)3 ( 21/)3 (
'3)/( 3/)(( 32)'( '/)2( '.-)'( 202).( '(0)'( '-)-( '41)-( 0'')2(
25
? 0ue o& Ris2% Asse!
@i.) ? 0ue SI$L CLC FC1ANGFOOD ADID>I>ES ACI >ADMAOIL AFTA$ACTO RDFOOD G> MARICO
/4'4')2' .-1.()32 0-2.')00 /02'/)/0 /-//0)// '2(-(-)010/0()'2 04/'3)00 41312)/' 4-.31)1. 42.-3()'2
Lo5 ? 0ue
.(24/)33 02/.')23 .4''0)44 .4/(0).3 /.334)(3 .1(32)(' .1-4()/2 .1./()30 .1.'4)24 .04(.)2( .-2223)33
C0osi'. ? 0ue
.(24/)33 .-0.')00 /'22-)..1'2/)0/ ///01)43 '(2/(1)04 0-((()-4 /3010)2/ /11..)3( 4.''1)32 0(23'-)'/
26
Ris2 Free Asse!
Initial 5alue Ending 5alue .1./(3)//30.'3)(0
>or!&o0io ? 0ue
+igh Total #ortfolio 5alue '30'223)'Low '('-4..)31 ,losing ''3-02')33
=u r!er 3 Ris2% Asse!
%ame *eigh t ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( Amount to &e Invested /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 Initial #rice '3)/( 3/)(( 32)'( '/)2( '.-)' ( 202). ( '(0)' ( '-)-( '41)( 0'')2 ( %o) of $hares ./'1)/ 3 33/-)3 3../)( 20-')0 ' 241)13 '//).2 /23)2. 3121)3 2'/)43 -3).( +igh Low ,losing
SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
'.).( 30)1( 31)'( 3.)/( '-/)(( 2-')'( '34)'( 30)'( 33')2( 11-)/(
'()4( 2')1( 3')-( '/)'( '.3)( ( 24'). ( -0)/( '-)1( '44)( /-3)1
'.).( 3.)1( 33)'( '4)(( '0').( 3(1)/( -1).( 3').( '-0).( 4.-)/(
? 0ue o& Ris2% Asse!
@i.) ? 0ue SI$L CLC FC1ANGFOOD ADID>I>ES ACI >ADMAOIL AFTA$ACTO RDFOOD
0/(00)40 0(/.1)32 014(4)(' -(...)22 4210-)3. 0(410)1. 0400()40 4.(41)12
Lo5 ? 0ue
.12.1)33 4'1..)// /2/.4)./ //4.2)3. /24-')-0 /443.)-0 /'24')(4 /0'-4)42
C0osi'. ? 0ue
0/(00)40 /0(3-)4' /.(20).4 034/4)30''.')(' 23.(0)'1 /3213)/3 0(421)-4
27
G> MARICO
0-104)-' 13'10)(1 4'23'/)--
/0'0/)1/ /.443)3. //-/(4)34
03((0)/0-3/()00 /4/1'0)'/
Ris2 Free Asse!
Initial 5alue Ending 5alue /100//)01 020/3').'
>or!&o0io ? 0ue
+igh Total #ortfolio 5alue '230(.()-2 Low ''43223)3' ,losing ''110.')(-
=u r!er Ris2% Asse!
%ame *eight Amount to &e Invested /-.23 /-.23 /-.23 /-.23 /-.23 /-.23 /-.23 /-.23 /-.23 /-.23 Initial #rice '.).( 3.)1( 33)'( '4)(( '0'). ( 3(1)/ ( -1).( 3').( '-0). ( 4.-)/ ( %o) of $hares .'34)32 32-0)./ 301-)32 2.-0)(( 201)32 31/)(/ 0(2)-1 3444)3( 2(3)0' 4-)2( +igh Low ,losing
SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'(
'/)'( 24)2( 30)/( 32)4( '12)(( 22/)'( ''2)(( 3-).( 3'/)2( 1-.)1(
'3)1( 31)3( 33)'( '0)-( '/()( ( 2/')' ( 10)4( 3').( '-0)0 ( 424)1 (
'/)(( 2/)'( 32)2( 33)-( '4')/( 22-)2( -2).( 34)(( 3'()(( 1-.)1(
? 0ue o& Ris2% Asse!
@i.) ? 0ue SI$L CLC FC1ANGFOOD ADID>I>ES ACI >ADMAOIL AFTA$ACTO RDFOOD
0323')'' 1-214)42 4'30.)01 131//)31 0421/)4-//'1)10 013/()33 1'0.-)0.
Lo5 ? 0ue
/3131).04/1()(( /-.23)(/ /-(13)./ //32.)3/ '(((4-)//320/).. /-.23)(/
C0osi'. ? 0ue
0'-(1)21.''/)/2 030/-)'2 1((/1).4 02'/')'0 -04'0)(/ /0.'3)'2 4.-1.)24
28
G> MARICO
0/'/')22 4(-/2)4' 4/.421)2.
/-.-3)/1 /1/(.)2( 03.(2')3(
02/.4)/' 4(-/2)4' 4'./(0)./
Ris2 Free Asse!
Initial 5alue Ending 5alue /-.23()/. 0/'42')-'
29
>or!&o0io ? 0ue
Total #ortfolio 5alue +igh '.(0.4()3/ Low '34/402)'' ,losing '200321)20
Dynamic allocation
In this strate3y, the mana3er replicates an option throu3h continuously revisin3 the proportions of a portfolio consistin3 of the underlyin3 asset /stock<+ond1 and the risk less asset /+ond<5%+ill1 to insure portfolio;s value. 5his strate3y re.uires +uyin3 more stock 4hen the market is 3oin3 up and sellin3 off some stock as the market 3oes do4n. 5he proportions allocated to the underlyin3 risky asset I the risk less asset chan3e every period, so this strate3y re.uires a si3nificant amount of tradin3. 5he no. of units of the underlyin3 risky asset that must +e held lon3 at any 3iven moment 4ill +e 3iven +y the call option;s 8DeltaF. 5he amount of risk less asset to hold is determined +y su+tractin3 the value of the units held in the underlyin3 asset from the total value of the insured portfolio.
Assu#6!io's:
In this analysis there have to invest in securities considerin3 the market scenario. It 4as not possi+le to apply our theoretical kno4led3e in practical applications in ri3id and structured form .For simplicity I have taken some assumptions for analytical purpose$ • 5otal amount of investment at the initial period is 5k. !(((((( and the distri+ution initially is "(?%"(? of our total fund in e.uity and 5%Bills respectively. • • 5he fund 4ill +e e.ually distri+uted amon3 " securities. 5here are considered 5% Bill as risk free asset
• 5ime period is considered as .uarterly I'i!i 0 I'ves!#e'! 5%Bill 5J. "((((( Investment in *tock 5k. "((((( 5otal mount 5k !(((((( 5he amount of e.uity 4ill +e e.ually distri+uted amon3 " securities.
30
Delta: Delta is the no. of shares that an investor 4ill +uy for each option shorted. *o
here delta 4ill determine ho4 much to +uy<sell in e.uity securities and 5%Bill. De0! E :I'sured ? 0ue i' @i.) - I'sured ? 0ue i' Lo5;F :,008 i' ris2% sse! i' )i.) - ,008 i' ris2% sse! i' 0o5;
Ti#e >eriod 0
'((= ;isky Asset E?uity T- ill "elta '>(((>((()(( /((((()(( /((((()(( ()/( %ew #ortfolio E?uity T- ill Total /((((()(( /((((()(( '(((((()(( Insured #ortfolio '(((((()((
*o, here the ta+le defines the picture for first period. 5he initial delta 4as ." 4hile it has reduced to %.!" in .uarter !. *o, this difference amount of shares is sold. 7ith the money provided +y sellin3 off the e.uity is used to +uy 5%Bill. 5he ultimate portfolio is found out +y su+tractin3 sold amount of shares from initial shares and addin3 the ne4 amount of 5%Bill to initial t%+ill.
,s! =u r!er
'((= ;isky Asset E?uity T- ill "elta uy $hare $ell T- ill .3-(//)'1 3'./34)//2--/()(( ')(/ 32.12')'4 32.12')'4 %ew #ortfolio E?uity T- ill Total ..-2/1)40 2(/''1)12 4/..44)/Insured #ortfolio 4/..44)/-
5he ta+le defines the picture for second period. 5he delta has increased to .'0 in .uarter '. *o, this difference amount of shares is +ou3ht. 5o +uy the shares 4e need money and this money is provided +y sellin3 off this amount of 5%Bill. 5he ultimate
31
portfolio is found out +y addin3 +ou3ht amount of shares to initial shares and su+tractin3 the sold amount of 5%Bill from initial t%+ill.
+'d =u r!er
'((= ;isky Asset E?uity T- ill "elta uy $hare $ell T- ill 4(1'/2)'/ 4.'00.)(2333(/).')3( '(.414)(33' '(.414)(33' %ew #ortfolio E?uity T- ill Total 1.0./')''(3 3'4.'1).04/ '(0210-)/1 Insured #ortfolio '(0210-)/1
*o, here the ta+le defines the picture for third period. . 5he delta has increased to .&in .uarter 0. *o, this difference amount of shares is +ou3ht. 5o +uy the shares 4e need money and this money is provided +y sellin3 off this amount of 5%Bill. 5he ultimate portfolio is found out +y addin3 +ou3ht amount of shares to initial shares and su+tractin3 the sold amount of 5%Bill from initial t%+ill.
3rd =u r!er
'((= ;isky Asset E?uity T- ill "elta $ell $hare uy T- ill 0-10.-)3/ 12/(-')'0 323024)40 ()13'(/4()2. 3'(/4()2. Insured #ortfolio '(04431)-3
%ew #ortfolio E?uity T- ill Total
03./3()13 ..23(1)'( '(04431)-3
32
-!) =u r!er
'((= ;isky Asset E?uity T- ill "elta 0(/423)-4 /.'.02)'.41110)2/ ()2' ,losing #ortfolio E?uity T- ill Total /.'.02)'.41110)2/ '(3(2.-)/. Insured #ortfolio '(3(2.-)/.
33
CONCLUSION
• In each period 4hen the e.uity value is increasin3, the delta is increasin3 and 4hen the e.uity value is decreasin3, the delta is decreasin3. It indicates that dynamic allocation strate3y has .uite successfully captured the stock price movement, • • ny violation of such +ehavior may +e related to sudden chan3e in market or effect of multiplier, n investor must look for every possi+le situation +efore en3a3in3 in dynamic asset allocation.
34
BIBLIOGRAPHY
1e"si!e 444.dse+d.or3 444.+an3ladesh%+ank.or3 >erso'
Dr. Mahmod Osman Imam Professor, Department of Finance, University of Dhaka.
35
Course Code: F-503 Course Code: Deriv !ives
Su"#i!!ed To
Dr. Mahmod Osman Imam Professor of Finance Department of Finance University of Dhaka
Su"#i!!ed $%
Golam Ruhani MB !"th Batch MB Roll #o$ !"%&'( BB Roll$ !"%!') Department of Finance Faculty of Business *tudies University of Dhaka
D !e o& Su"#issio': (!) Fe"ru r%* +0,-
1
Letter of Transmittal
Fe+ruary ), '(!-
Dr. Mahmod Osman Imam Professor of Finance Department of Finance University of Dhaka Dear *ir, It is my immense pleasure to su+mit my class report as you asked me to prepare and su+mit as a re.uirement of Financial Derivatives course /F%"(01 on 2 Dynamic sset llocation strate3y 2. I have tried my +est to compile the pertinent information as comprehensively as possi+le and if you need any further information, I 4ill +e o+li3ed to assist you.
5hankin3 you, Golam Ruhani MB !"th Batch MB Roll #o$ !"%&'( BB Roll$ !"%!') Department of Finance Faculty of Business *tudies University of Dhaka
2
ACKNOWLEDGEMENTS
t first I 4ould like thank our course teacher Dr. Mahmod Osman Imam for 3ivin3 us such an important 6o+ like mana3in3 the portfolio insurance usin3 dynamic asset allocation strate3y. Durin3 the preparation of the report 4e did have some pro+lem that has +een erased out 4ith your propound lecture and assistance. 7ithout your cooperation and 3uideline this report 4ould have +een an incomplete one. Finally thank you for your supportive thou3ht and kind consideration for formulatin3 an idea.
3
EXECUTIVE SUMMARY
5his report 8Dynamic sset llocation *trate3y 2 is prepared to fulfill the partial re.uirement of Financial Derivatives course /F%"(01 of MB Pro3ram of University of Dhaka. 5he o+6ective of this report is to find out ho4 e.uity risk can +e mana3ed /either eliminated or reduced1 throu3h dynamic asset allocation. 5his report discusses the 4ays of handlin3 the risk arisin3 from holdin3s of portfolio of risky assets and riskless assets that means ho4 to mana3e insured portfolio 4hich is a hed3in3 techni.ue fre.uently used +y institutional investors 4hen the market direction is uncertain or volatile. Portfolio insurance is a dynamic tradin3 strate3y desi3ned to protect a portfolio from market declines 4hile preservin3 the opportunity to participate in market advances. *everal portfolio insurance methods e9ist and are used in practice. 5he +est kno4n strate3y involves tradin3 in :real; and < or :synthetic; options. For some reasons, most investors prefer not to use the option market for insurin3 the portfolio. =ence it calls for the dynamic tradin3 strate3y replicatin3 the option strate3y to insure the portfolio. In this strate3y, the mana3er replicates an option throu3h continuously revisin3 the proportions of a portfolio consistin3 of the underlyin3 risky asset /stock<+ond1 and the riskless asset /+ond<5%+ill1 to insure portfolio;s value. In this report I have to analy>e the industry and company to select the securities to invest. First I construct t4o portfolios one investin3 !((? in e.uity another investin3 "(? in e.uity and "(? in +onds. 5otal amount of investment is ",((,((( taka. nd assumed +ond rate 4as @?. fter static approach I found out Delta. Delta tells us the num+er of shares to +e hold to hed3e the portfolio. Delta is the differences +et4een hi3her and lo4er value of "(? e.uity investment divided +y the differences +et4een hi3her and lo4er value of !((? e.uity investment. =ere I assume that there is a A(? chance to reali>e the hi3her value and )(? chance to reali>e the lo4er value. 5hen I assi3n the portfolio accordin3 to delta and find out the insured value.
4
Overview of Dynamic Asset allocation
Asset allocation-a new dimension to portfolio performance
Different persons have different portfolio mana3ement needs, some 4ant to ma9imi>e the return, some 4ant to minimi>e risks 4ith steady investment 3ro4th, some 4ant constant earnin3s, and some others 4ant to earn more spendin3 least time. Dynamic asset allocation is one such portfolio mana3ement strate3y 4hich aims at ma9imi>in3 the portfolio return +y active mana3ement of portfolio components. 5o construct an asset allocation portfolio, one invests amon3 various asset classes, such as stocks, +onds, cash and others. 5he returns of the asset classes tend to +e affected +y different factors and thus, face different risks. Bsta+lishin3 an appropriate asset mi9 is a dynamic process, and it plays a key role in determinin3 portfolio;s overall risk and return. very important asset allocation strate3y is dynamic asset allocation, 4ith 4hich investor constantly ad6usts the mi9 of assets as markets rise and fall and the economy stren3thens and 4eakens. Unlike t4o other popular portfolio mana3ement strate3ies, strate3ic and tactical asset allocations strate3ies, dynamic asset allocation does not involve keepin3 a fi9ed investment ratio. Dynamic investors diversify their investments +y investin3 in e.uities, mutual funds, inde9 funds, currencies, derivatives and fi9ed income securities. 5hey +uy instruments 4hich are risin3 /or are predicted to rise1 and they sell instruments 4hich are fallin3 /or are predicted to fall1. lthou3h not common, many dynamic investors keep a reasona+le proportion +et4een hi3h%return<hi3h%risk instruments such as stocks and lo4%return<lo4%risk instruments such as treasury +onds. Bvaluation of current trends and prediction of future trends on investments are very important 4ith dynamic asset allocation. Investors can use a ran3e of technical and fundamental analysis tools for this purpose. *uccessful dynamic investors are those 4ho make ri3ht +uy and sell decisions at ri3ht time. 5here are a fe4 different strate3ies of esta+lishin3 asset allocations, and there are outlined some of them and e9amined their +asic mana3ement process.
5
S!r !e.i/ Asse! A00o/ !io' *trate3ic asset allocation is a method that esta+lishes and adheres to 4hat is a C+ase policy mi9C. 5his is a proportional com+ination of assets +ased on e9pected rates of return for each asset class. For e9ample, if stocks have historically returned !(? per year and +onds have returned "? per year, a mi9 of "(? stocks and "(? +onds 4ould +e e9pected to return @."? per year. Co's! '!-1ei.)!i'. Asse! A00o/ !io': *trate3ic asset allocation 3enerally implies a +uy%and%hold strate3yD even as the shift in the values of assets causes a drift from the initially esta+lished policy mi9. For this reason, may choose to adopt a constant%4ei3htin3 approach to asset allocation. 7ith this approach, portfolio can +e re+alanced. For e9ample, if one asset 4ere declinin3 in value, 4ould +e purchase more of that asset, and if that asset value should increase, 4ould sell it. 5here are no hard%and%fast rules for the timin3 of portfolio re+alancin3 under strate3ic or constant%4ei3htin3 asset allocation. =o4ever, a common rule of thum+ is that the portfolio should +e re+alanced to its ori3inal mi9 4hen any 3iven asset class moves more than "? from its ori3inal value. T /!i/ 0 Asse! A00o/ !io' Over the lon3 run, a strate3ic asset allocation strate3y may seem relatively ri3id. 5herefore, it may necessary to occasionally en3a3e in short%term, tactical deviations from the mi9 in order to capitali>e on unusual or e9ceptional investment opportunities. 5his fle9i+ility adds a component of market timin3 to the portfolio, allo4in3 you to participate in economic conditions that are more favora+le for one asset class than for others. 5actical asset allocation can +e descri+ed as a moderately active strate3y, since the overall strate3ic asset mi9 is returned to 4hen desired short% term profits are achieved. I'sured Asse! A00o/ !io' 7ith an insured asset allocation strate3y, esta+lish a +ase portfolio value under 4hich the portfolio should not +e allo4ed to drop. s lon3 as the portfolio achieves a return a+ove its +ase, try to increase the portfolio value as much as possi+le. If, ho4ever, the portfolio should ever drop to the +ase value, invest in risk%free assets so that the +ase value +ecomes fi9ed.
6
I'!e.r !ed Asse! A00o/ !io' 7ith inte3rated asset allocation there are considered +oth economic e9pectations and your risk in esta+lishin3 an asset mi9. Inte3rated asset allocation, on the other hand, includes aspects of all strate3ies, accountin3 not only for e9pectations +ut also actual chan3es in capital markets and risk tolerance. D%' #i/ Asse! A00o/ !io' nother active asset allocation strate3y is dynamic asset allocation, 4ith 4hich investor constantly ad6usts the mi9 of assets as markets rise and fall and the economy stren3thens and 4eakens. 7ith this strate3y investor sell assets that are declinin3 and purchase assets that are increasin3, makin3 dynamic asset allocation the polar opposite of a constant%4ei3htin3 strate3y. For e9ample, if the stock market is sho4in3 4eakness, one sell stocks in anticipation of further decreases, and if the market is stron3, one purchase stocks in anticipation of continued market 3ains.
Importance of dynamic asset allocation
num+er of factors make dynamic asset allocation a via+le strate3y$ • The cyclical moves of financial markets:
Over a century of market history has clearly sho4n that dissimilar investment cate3ories +ehave differently at different times in the economic cycle. 5he dynamic asset allocation;s challen3e is to use technical and<or fundamental analysis to attempt to identify 4here the cycle are e9isted and 4hat investment cate3ories appear to have the stron3est potential for appreciation. • Increase in returns utilizing efficient investing decision:
5his is a key reason that dynamic asset allocators do not have to +e !((? ri3ht to produce hi3her risk%ad6usted returns. It is not uncommon for top%performin3 sectors to e9perience advances of "(? or more annually. 7hile the do4nside risk of some market sectors makes investin3 in these areas potentially dan3erous in a fi9ed asset allocation strate3y, dynamic asset allocation can harness their positive features and ener3i>e investor portfolios.
7
•
Efficiency of the strategy with mutual funds:
Usin3 mutual funds in a dynamic asset allocation strate3y further reduces risk +y providin3 instant diversification across hundreds of securities 4ithin each asset class and allo4in3 investors to move assets overni3ht +et4een funds 4ith little or no cost. • Existence of ear markets:
Properly implemented, a dynamic asset allocation strate3y should lessen an investorCs e9posure to declinin3 markets, +luntin3 the impact of +ear markets and preservin3 capital the ma6ority of prior 3ains. 5he more investors lose money in a do4n market, the more they lose valua+le time and opportunity. • Importance of technology:
Eomputers and on%line data+ases have 3iven investment mana3ers po4erful tools for analy>in3 the market and developin3 comple9 dynamic allocation models. By +ack testin3 these models a3ainst historical data, dynamic asset allocators have developed parameters and models, 4hich indicate the asset classes that appear to +e in sustained up4ard trends and should surpass other investments in the current market climate. Given a 4orkin3 kno4led3e of the markets and cycles, todayCs allocator can track a multitude of indicators to determine 4hat people are doin3 in the market and 4hich actions or data si3nal a fundamental chan3e in economic climate. fter 4ei3hin3 the attractiveness of different asset classes, the money mana3er develops an asset allocation strate3y, 4hich distri+utes monies amon3 different funds<asset classes +ased on return pro+a+ilities. 7hen the asset allocation model indicates chan3es in the attractiveness of an asset class, monies are moved to different funds.
8
!oals of dynamic asset allocation
Redu/i'. ris2 3 /)ievi'. )i.)er ris2 d4us!ed re!ur'
5he o+6ective of dynamic asset allocation is to reduce the risk or fluctuation in the value of an investorCs account 4hile achievin3 hi3her returns than other investments 4ith similar risk. 5he success of a dynamic asset allocation approach depends upon the a+ility of the investment advisor to identify those asset classes achievin3 the hi3hest returns in each market phase. #ot every investment decision 4ill +e perfect, +ut over a full market cycle, a dynamic asset allocation approach offers the potential for superior risk%ad6usted results, outperformin3 the impact of ta9es and inflation, and leavin3 the investor 4ith real 3ro4th.
Redu/i'. ris2 5i!)ou! s /ri&i/i'. 6er&or# '/e
Dynamic asset allocation, like a 2fi9ed2 asset allocation strate3y, seeks to reduce risk throu3h diversification amon3 different investment cate3ories. Usin3 dynamic asset allocation, ho4ever, the investor selects or 4ei3hts investments +ased on those cate3ories 4ith the 3reatest potential for superior returns, 3iven current market conditions. 5he allocation of assets +ecomes dynamic %% chan3in3 in response to market conditions and perceived opportunities for profit. In studies of the performance of money mana3ers, asset allocation decisions, rather than individual stock selection, have +een sho4n to account for )( to A(? and more of a portfolioCs performance. 5op performin3 mana3ers are those 4ho are invested in the +est performin3 asset classes durin3 different periods of the market.
9
enefits of dynamic asset allocation
5he practice of dynamic asset allocation /also called tactical or active asset allocation1 has 3ro4n in recent years due to the success of various computeri>ed market%timin3 techni.ues in analy>in3 market trends. 5hese ne4 technolo3ies typically do not predict future market movements as much as they identify chan3es in trend direction and evaluate the risk of chan3es in a trend. 7ith this advanced technolo3y, the asset allocation practitioner can respond dynamically to the market and si3nificantly increase risk%ad6usted return over time +y$
•
voidin3 +ear markets and periods of under%performance in the various asset classes%%either +y reducin3 or eliminatin3 the allocation of the under% performin3 asset /e.3., 3ettin3 out of the market1.
•
Increasin3 the allocation of asset classes currently in +ull markets that are over%performin37 Dynamic asset allocation eliminates the key 4eakness found in the traditional, fi9ed approach that routinely allo4s periods of under%performance. 5he portfolio mi9 of our 3eneric Model Portfolios 4ill shift dynamically over time to avoid periods of under%performance and move into investment types that are performin3 4ell. 5he net effect is reduced losses, lo4er volatility, hi3her avera3e returns and a much stron3er risk%ad6usted return.
•
•
Dynamic approaches to asset allocation are inherently more efficient than the traditional, fi9ed approach. 5hey can si3nificantly +oost returns over time +y .uickly reactin3 to chan3in3 market conditions for various asset classes and sectors, capturin3 periods of over%performance and avoidin3 periods of under%performance.
10
"ynamic trading strategy: #ortfolio Insurance
Portfolio insurances a dynamic tradin3 strate3y desi3ned to protect a portfolio from market declines 4hile preservin3 the opportunity to participate in market advances. *everal portfolio insurance methods e9ist and are used in practice. 5he +est%kno4n strate3y involves tradin3 in 8realF or 8syntheticF options. 7ith the introduction of e9chan3e%traded inde9 put options, it seemed theoretically possi+le for an investor to use these contracts to insure 4ell%diversified portfolios, especially inde9 funds. For some reasons, most investors prefer not to use the option market for insurin3 the portfolios. =ence it calls for the dynamic tradin3 strate3y replicatin3 the option strate3y to insure the portfolio. In this strate3y the mana3er replicates an option throu3h a process of continually revisin3, in a prescri+ed manner, the proportions of a portfolio consistin3 of the underlyin3 the asset and the risk%less asset. Besides, the comple9 nature of the underlyin3 option pricin3 theory , the dynamic strate3y calls for +uyin3 more stock 4hen the market is 3oin3 up and sellin3 off some stock as the market 3oes do4n. 5he +asic dynamic tradin3 approach involves replicatin3 the insured portfolio;s price 4ith an ever%chan3in3 com+ination of positions in the underlyin3 portfolio and the risk less asset. 5he proportions allocated to the underlyin3 portfolio and the risk less asset chan3e every period, so that the dynamic insurance strate3y re.uires a si3nificant amount of tradin3. 7e 4ill see in the report that ho4 the same replication is accomplished /appro9imately1 4ith either a stock portfolio and short futures positions or the risk less futures. 5he num+er of units of the underlyin3 portfolio that must +e held lon3 at any 3iven moment 4ill +e 3iven +y the call option;s 8deltaF, the reciprocal of ho4 many calls it takes to hed3e a unit of the underlyin3 portfolio. 5he call delta tells us the num+er of units of the underlyin3 portfolio to hold. 5he amount of the risk less asset to hold is determined +y su+tractin3 the value of the held units of the underlyin3 portfolio from the total value of the insured portfolio.
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Application Of Dynamic Asset Allocation $tatic allocation
5his part has +een done in ' parts% static allocation and dynamic allocation. In doin3 the static asset allocation, - scenarios are considered namely% • !((? Investment in B.uity portfolio i.e. Risky Portfolio. • !((? Investment in 5 G Bill i.e. Risk free portfolio. • "(? % "(? investment in B.uity and 5 G Bill /Eonstant 4ei3ht1 • *tatic "(? % "(? investment in B.uity and 5 G Bill 5he stocks have +een selected from Dhaka *tock B9chan3e /D*B1. *tocks are selected from five different industries 4ith the cyclical and counter%cyclical nature of +usiness for diversification. 5here are considered 5% Bill as risk free asset and there are also considered A! days 5% Bill rate.
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ssumptions$ mount to +e invested is !(((((( tk. Investment hori>on is one year. Portfolios are e.ually 4ei3hted after every .uarter. #um+ers of shares to +e invested are determined 4ith closin3 price of last .uarter. 7hen !((? investment is in risky asset, then money is allocated amon3 the stocks e.ually. In first .uarter the '((((( amount of money allocated to each company is divided +y the closin3 price of last .uarter of '(!( to 3et the no. of shares. fter findin3 that, there are considered the hi3h, lo4 and closin3 prices for .uarter !. 5he final num+er of shares is found +y ad6ustin3 the stock dividend. 5he portfolio value is found out +y multiplyin3 the no. of shares 4ith the correspondin3 prices. 5hus the closin3 value at and of !st .uarter are (55<(070(. It 4ill +e the amount availa+le for investment for second .uarter and the procedure 3oes like this for rest ' .uarters.
12
%ame
Amount to &e Invested '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()((
SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
=u r!er ,
%ame *eight Amount to &e Invested '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( '((((()(( Initial #rice '-).( 2')0( 3/)0( '4)4( '.2)(( '11).( 1/)1( 3/)2( '43)0( 241)(( %o) of $hares /'/.)0. 2'0.)/0 2-(0)3/ /0.-)43 0--)2( /2()4''0/)/( 2-/3)/4 /4-)24 30.)// +igh Low ,losing
SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'(
'1)2( 31)2( 30)0( '1).( '/-)(( '-1)1( 10)-( 2')2( '4.)-( .'3)1(
'.)1( 2-)-( 3()-( '.)/( '3-)2( '01)(( 04)2( '4)-( '.')(( 22-)-(
'/)(( 3.).( 3')1( '/).( '2()(( '4()'( 4.)/( '1)2( '.4)2( 2--)0(
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SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
+igh 5alue -.23-)-( 1-//0)-0 '(2-(0)3/ '(2-/.)1( ''''11)1' '(//3()'4 '('313)(/ '324'/).3 '('223)/0 '(-3(0)2/ '(.2--2)34 Low 5alue 40311)00 '3030/)13 1'0.()02 1'-3()-( -(.'-)/1 1-'4')-4 41.21)32 4(4/()-1'0-')44 1--3()02 100/(-)',losing 5alue 442'-)/443'/)'1/'/0)3/ 14((/)0/ -(-(-)(-(310)03 1013-)1. 43223)(3 1/2.')12 '(/4'.)31/1''()20
13
=u r!er +
%ame $I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 *eight ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( Amount to &e Invested 1/1'' 1/1'' 1/1'' 1/1'' 1/1'' 1/1'' 1/1'' 1/1'' 1/1'' 1/1'' Initial #rice '/)(( 3.).( 3')1( '/).( '2()(( '4()'( 4.)/( '1)2( '.4)2( 2--)0( %o) of $hares /43()4. 2/'0)1/ 2-20)3//43)'/ 00()(1 /(.).4 ''/')12 .01-)'2 /13)/0 3'.)4. +igh '4)4( 3/)'( 2')3( '4)-( '/-)1( ./-)0( '22)'( 3/)/( 321)(( 0//)'( Low '3)/( 23)(( 3')3( '/)'( './)/( '01)0( 4/)2( '1)2( '.4)3( 21/)3( ,losing '3)/( 3/)(( 32)'( '/)2( '.-)'( 202).( '(0)'( '-)-( '41)-( 0'')2(
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,ompany $I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 +igh 5alue Low 5alue ,losing 5alue '('3/4)(3 4'/(-)3( 4'/(-)3( 11343)12 ''3/2-)(0 14-3')'. '331'3)'2 12..-)30 -(-31)3' --4.').( 1.'2-)21/3/2)13 '(/.1')/4 -0(.3)2/ -1.'1)00 32'1/0)34 1/(/.)22 '1223/)14 '/22(1)(. 10423)/( '333(1)4. ''-/43)40 1/1'')(. -22'2)0. '210.-)3( 1/4/3)41 '(.3'-)-3 '.(044)4( 134'1)4/ '2'34')-'2('031)- 1424.1)0/ '(0124')'1 '
14
=u r!er 3
%ame $I L 6L, 76*A%!788 " A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 *eight ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( Amount to &e Invested '(0124 '(0124 '(0124 '(0124 '(0124 '(0124 '(0124 '(0124 '(0124 '(0124 Initial #rice '3)/( 3/)(( 32)'( '/)2( '.-)'( 202).( '(0)'( '-)-( '41)-( 0'')2( %o) of $hares 1/.0)4 .342). 1 .03.)1 0-13)1 3 4'0)// 3-2)-'((0)/ /201)4 ( /-4)''4.)44 +igh '.).( 30)1( 31)'( 3.)/( '-/)(( 2-')'( '34)'( 30)'( 33')2( 11-)/( Low '()4( 2')1( 3')-( '/)'( '.3)(( 24').( -0)/( '-)1( '44)-( /-3)1( ,losing '.).( 3.)1( 33)'( '4)(( '0').( 3(1)/( -1).( 3').( '-0).( 4.-)/(
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$I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 +igh 5alue '32(40)20 ''./3-)2'3--03)(. '4'(4-)(/ '2-430)0' ''.-1()42 '34-12)(' '.('32)(/ '23'/4)-2 '//./1)32 '2.-(40).' Low 5alue -'./3)/4 '2/1-0)1' '('314)'. '(/..()// '('4.-)0. '(-'1-)(0 -4'4().3 '(02(()3/ '(032-)-2 '(20(2)14 '(/122()3/ ,losing 5alue '32(40)20 '(/-13).3 '(33'3)'2 ''14(4)-' ''/0/()0. 0'3-4)/1 --(12)03 ''.1-()'4 ''4314)-2 '2(--()21 '(1-'4-)'/
15
=u r!er %ame $I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 *eight ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( Amount to &e Invested '(1-'1 '(1-'1 '(1-'1 '(1-'1 '(1-'1 '(1-'1 '(1-'1 '(1-'1 '(1-'1 '(1-'1 Initial #rice '.).( 3.)1( 33)'( '4)(( '0').( 3(1)/( -1).( 3').( '-0).( 4.-)/( %o) of $hares 4/02)4 . .2-')1 / .-31). ' 0.(0). 04.)12 /33)2''(0)1 /(1-)0 3 //.)/4 './)23 +igh '/)'( 24)2( 30)/( 32)4( '12)(( 22/)'( ''2)(( 3-).( 3'/)2( 1-.)1( Low '3)1( 31)3( 33)'( '0)-( '/()(( 2/')'( 10)4( 3').( '-0)0( 424)1( ,losing '/)(( 2/)'( 32)2( 33)-( '4')/( 22-)2( -2).( 34)(( 3'()(( 1-.)1(
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$I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 +igh 5alue ''.3'3)/. '021'0)(0 '2(0(3)-2 '/'1..)2'32.-.)3'4/(/3)3/ '3/(41)/( '.-02.)1''-2--)23 '2((22)(3 Low 5alue -01'/)-3 '321/()3' '(1-'4)-' '(1344)33 '('33.)12 '12.'()./ -/-04)2' '(1-'4)-' '(-(31)12 '(43'4)00 ,losing 5alue ''2./0)'0 '/.'/2)-1 ''.123)(' '.04'1)1. ''/422)43 '443.0)31 '(2212).4 '24.'-)1( ''0.0()('2((22)(3
'212'01)'1
''.2031)30
'2(-.24)24
16
S/e' rio + ,008 i'ves!#e'! i' T-$i00 :ris2% &ree sse!;
!((? risk free$ 5%Bill Investment H!
1079900
H'
117331 1
H0
1273043
H139601 9
1000000
In case of !((? risk free investment in 5%Bill the portfolio value is +ein3 compounded in each .uarter and thus increasin3 from .uarter to .uarter.
S/e' rio 3 508 i'ves!#e'! i' e9ui!% 3 508 i' T-$i00
7hen "(? investment is in risky asset and "(? investment in risk free asset then money is allocated amon3 the stocks e.ually. In first .uarter the !((((( amount of money allocated to each company is divided +y the closin3 price of last .uarter of '(!( to 3et the no. of shares. fter findin3 that, there are considered the hi3h, lo4 and closin3 prices for .uarter !. 5he final num+er of shares is found +y ad6ustin3 the stock dividend. 5he portfolio value is found out +y multiplyin3 the no. of shares 4ith the correspondin3 prices. 5hus the closin3 value at and of ! st .uarter are -'@AA(.(-. It 4ill +e the amount availa+le for investment for second .uarter and the procedure 3oes like this for rest ' .uarter. 5he closin3 value a of !st .uarter;s risk free asset are "')(((.((. It 4ill +e the amount availa+le for investment for second .uarter and the procedure 3oes like this for rest .uarters.
-'-"ay T- ill ;ate: <uarterly Au !"#$ D%!& 4)--= 31'D& '13 1)0/= 30'S&('13 1)/(= 30')u$'13 -)00= 30'M%*'13 <uarterly 4)--= 1)0/= 1)/(= -)00=
17
=u r!er , Ris2% Asse!
%ame $I L 6L, 76*A%!788 " A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 *eigh t ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( Amount to &e Invested /(((( /(((( /(((( /(((( /(((( /(((( /(((( /(((( /(((( /(((( Initial #rice '-).( 2')0( 3/)0( '4)4( '.2)(( '11).( 1/)1( 3/)2( '43)0( 241)(( %o) of $hares 3/44)2 3 '/13)3 1 '-/2)' 2 313.)1 0 2.-)0/ 30/)2/13)4/ '-40)3 1 31-)0'23)31 +igh '1)2( 31)2( 30)0( '1).( '/-)( ( '-1)1 ( 10)-( 2')2( '4.)( .'3)1 ( Low '.)1( 2-)-( 3()-( '.)/( '3-)2( '01)(( 04)2( '4)-( '.')(( 22-)-( ,losin g '/)(( 3.).( 3')1( '/).( '2()(( '4()'( 4.)/( '1)2( '.4)2( 2--)0
? 0ue o& Ris2% Asse!
$I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 +igh 5alue .4'0.)-/ ..441).1 /'-/2)'2 /'-44).( ///-.).' /340()(1 /(0.')(2 0'1/4)4' /(000)31 /.0(2)'4 /3'--0)02 Low 5alue 21'..)22 02'23)-' .(13()2' .(-0()./ ./3(-)4../1/)-2-3'-)'' 2/24/)..(1./)1..-0()23 .223/.)0( ,losing 5alue 210/-)4210(4)/.3/41)'2 .2/(3)13 ././.)// ./'.2)2' .2.'.)-3 20'00)(' .304()-3 /31/4)'. .3-(//)'1
Ris2 Free Asse!
Initial 5alue Ending 5alue /((((()(( /2--/()((
>or!&o0io ? 0ue
Total #ortfolio 5alue +igh '(0'-.0)02 Low -423(.)0( ,losing -0-((/)'1
18
19
=u r!er + Ris2% Asse!
Amount to &e Investe d .3-(0 .3-(0 .3-(0 .3-(0 .3-(0 .3-(0 .3-(0 .3-(0 .3-(0
%ame $I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !#
*eight ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'(
Initial #rice '/)(( 3.).( 3')1( '/).( '2()(( '4()'( 4.)/( '1)2( '.4)2(
%o) of $hares 310()24 '4/1).3 '-01)'. 3410)(4 22()(. 3/3)3. /4/)-' 32..)/0 3-')31
+igh '4)4( 3/)'( 2')3( '4)-( '/-)1 ( ./-)0 '22)' ( 3/)/( 321)(
Low '3)/( 23)(( 3')3( '/)'( './)/ '01)0 4/)2( '1)2( '.4)3
,losing '3)/( 3/)(( 32)'( '/)2( '.-)'( 202).( '(0)'( '-)-( '41)-(
? 0ue o& Ris2% Asse!
SI$L CLC FC1ANGFOOD ADID>I>ES ACI >ADMAOIL AFTA$ACTO RDFOOD G> MARICO @i.) ? 0ue 50A+(75, --,3A7-, A,-0A70A -<(B07B0 5+B-07B( ,,5<+(7,BAA5-70+ 5<B(A73( A<3+-7A0 B033(7(5 A50(,-7-5 Lo5 ? 0ue 35B5-7A0 5A+A<753 -,B+-7A3 -+0A<7B0 -(0+,7,( -+5+B7,A -33AA7+5 -+<0575+ -+(BA73< -,35<73B -3A(B-733 C0osi'. ? 0ue 35B5-7A0 -3<A075B -5-A-7,0 -+A+A7<, -<+0<733 <,AA+7<A,,0-73B -AA5A7(+ 5+,0<7<A A5A357<< 53-,(575<
Ris2 Free Asse!
Initial 5alue Ending 5alue /2--/()(( /100//)01
>or!&o0io ? 0ue
+igh Total #ortfolio 5alue '324.4()'2 Low '(32/2()(( ,losing ''3(1.')34
20
=u r!er 3 Ris2% Asse!
%ame *eight Amount to &e Investe d /2.'/2.'/2.'/2.'/2.'/2.'/2.'/2.'/2.'Initial #rice %o) of $hares +igh Low ,losing
$I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !#
()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'(
'3)/( 3/)(( 32)'( '/)2( '.-)'( 202).( '(0)'( '-)-( '41)-(
.342).1 3'20)4. 32'3).2.-').' 2/1)34 '.4)(( /(2).4 301.)2/ 3-1)/-
'.).( 30)1( 31)'( 3.)/( '-/)( ( 2-')' ( '34)' ( 30)'( 33')2 (
'()4( 2')1( 3')-( '/)'( '.3)( 24'). -0)/( '-)1( '44)-
'.).( 3.)1( 33)'( '4)(( '0').( 3(1)/( -1).( 3').( '-0).(
? 0ue o& Ris2% Asse!
@i.) ? 0ue SI$L CLC FC1ANGFOOD ADID>I>ES ACI >ADMAOIL AFTA$ACTO RDFOOD G> MARICO
0'/21)'1 /430.)4( 0.-1')(3 1//2-)/3 0-102)2' /4.-()20 02--')/' 4((0')/2 00(41)-4 4443-)'3 04./21)3'
Lo5 ? 0ue
./430)304-.1).' /(0.2)/4 /343()31 /(14.)13 /./-.)/2 .1/1/)3' /2'/()'3 /2''-)-0 /'1(')-2 /3-'0/)'2
C0osi'. ? 0ue
0'/21)'1 /3--')3' /''(0)(4 /-2/2)-/ /413/)23 2(0.1)4.-/.')1' /4../)(1 /10.2)-0 0/.-/)'/../1-)/4
Ris2 Free Asse!
Initial 5alue Ending 5alue /100//)01 020/3').'
>or!&o0io ? 0ue
Total #ortfolio 5alue +igh '2''(/-)0' Low ''0/010)/2 ,losing ''1'''()-1
21
22
=u r!er Ris2% Asse!
%ame $I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8 *eight ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( Amount to &e Invested /..//..//..//..//..//..//..//..//..//../Initial #rice '.).( 3.)1( 33)'( '4)(( '0').( 3(1)/( -1).( 3').( '-0).( 4.-)/( %o) of $hares 241')1 4 3'-/)2 3.0.)3 ' 23(2). 4 224).3 30')'//2).. 3/..)1 ' 344)343)00 +igh '/)'( 24)2( 30)/( 32)4( '12)( ( 22/)' ( ''2)( ( 3-).( 3'/)2 ( 1-.)1 ( Low '3)1( 31)3( 33)'( '0)-( '/()( ( 2/')' ( 10)4( 3').( '-0)0 ( 424)1 ( ,losing '/)(( 2/)'( 32)2( 33)-( '4')/( 22-)2( -2).( 34)(( 3'()(( 1-.)1(
? 0ue o& Ris2% Asse!
@i.) ? 0ue SI$L CLC FC1ANGFOOD ADID>I>ES ACI >ADMAOIL AFTA$ACTO RDFOOD G> MARICO
/4'(0)34 1'-(1)(2 0/2(').0 4/-33)'0'4.4)'. 14/30)'3 03/2-)3/ 4.1'4)./ /-0--)00 0/('0)/' 0-'/1.)(-
Lo5 ? 0ue
.1.(4)-0 0'-3/)'( /../1)-0 /.'21)0' /(0'3).' -'4(/)32 .4-12)0/ /../1)-0 /./'.).' /20(1)12 /4'1'.)'2
C0osi'. ? 0ue
/0431)(1 44(40)-/4.'0)(( 422/-).3 /4100)10 11032)'. /'0-')42 014(-)-( /132()(/ 0/('0)/' 0/.4'1)01
Ris2 Free Asse!
Initial 5alue Ending 5alue 020/3').' 0-1((-)21
>or!&o0io ? 0ue
23
+igh Total #ortfolio 5alue '21-/-2).4
Low '30-132)/'
,losing '2/3431)(0
Scenario 4 S! !i/ 508 I'ves!#e'! i' E9ui!% 3 508 i' T-$i00 Re- 00o/ !io' S/)edu0e
;e-allocation #roportion $tock T- ill efore ;e-allocation $tock T- ill Total After ;e-allocation $tock T- ill Total /(= /(= 'st <uarter .3-(//)'1 /2--/()(( -0-((/)'1 3nd <uarter 0(23'-)'/ /30.'3)(0 ''3-02')33 2rd <uarter /4/1'0)'/ 0'313.)-. ''110.')(.th <uarter 4'./(0)./ 0/'42')-' '200321)2 0 012''-)'1 012''-)'1 '200321)2 0
.1./(3)/.1./(3)/-0-((/)'1
/0.1'/)0' /0.1'/)0' ''3-02')33
/-.23()/. /-.23()/. ''110.')(-
=u r!er , Ris2% Asse!
%ame *eight Amount to &e Invested /(((()(( /(((()(( /(((()(( /(((()(( /(((()(( /(((()(( /(((()(( /(((()(( /(((()(( /(((()(( Initial #rice '-).( 2')0( 3/)0( '4)4( '.2)( ( '11). ( 1/)1( 3/)2( '43)0 ( 241)( %o) of $hares 3/44) '/13)3 '-/2)' 2 313.)1 2.-)0/ 30/)2/13)4/ '-40)3 31-)0'23)31 +igh Low ,losin g '/)(( 3.).( 3')1( '/).( '2()(( '4()'( 4.)/( '1)2( '.4)2( 2--)0(
SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'(
'1)2( 31)2( 30)0( '1).( '/-)(( '-1)1( 10)-( 2')2( '4.)-( .'3)1(
'.)1( 2-)-( 3()-( '.)/( '3-)2 ( '01)( ( 04)2( '4)-( '.')( ( 22-)-
? 0ue o& Ris2% Asse!
+igh 5alue Low 5alue ,losing 5alue
24
$I L 6L, 76*A%!788" A9I9#I#E$ A,I #A":A8IL A7TA A6T8 ;"788" !# :A;I,8
.4'0.)-/ ..441).1 /'-/2)'2 /'-44).( ///-.).' /340()(1 /(0.')(2 0'1/4)4' /(000)31 /.0(2)'4 /3'--0)02
21'..)22 02'23)-' .(13()2' .(-0()./ ./3(-)4../1/)-2-3'-)'' 2/24/)..(1./)1..-0()23 .223/.)0(
210/-)4210(4)/.3/41)'2 .2/(3)13 ././.)// ./'.2)2' .2.'.)-3 20'00)(' .304()-3 /31/4)'. .3-(//)'1
Ris2 Free Asse!
Initial 5alue Ending 5alue /((((()(( /2--/()((
>or!&o0io ? 0ue
+igh Total #ortfolio 5alue '(0'-.0)02 Low -423(.)0( ,losing -0-((/)'1
=u r!er + Ris2% Asse!
%ame *eight Amount to &e Invested .1./( .1./( .1./( .1./( .1./( .1./( .1./( .1./( .1./( .1./( Initial #rice '/)(( 3.).( 3')1( '/).( '2()(( '4()'( 4.)/( '1)2( '.4)2( 2--)0( %o) of $hares 232()( 3 '-1/)0 4 3333). 2'.0)' 3 243)031.)12 0/()2. 30.4)/ 0 231)-3 '3')3/ +igh Low ,losing
SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'(
'4)4( 3/)'( 2')3( '4)-( '/-)1( ./-)0( '22)'( 3/)/( 321)(( 0//)'(
'3)/( 23)(( 3')3( '/)'( './)/ ( '01)0 ( 4/)2( '1)2( '.4)3 ( 21/)3 (
'3)/( 3/)(( 32)'( '/)2( '.-)'( 202).( '(0)'( '-)-( '41)-( 0'')2(
25
? 0ue o& Ris2% Asse!
@i.) ? 0ue SI$L CLC FC1ANGFOOD ADID>I>ES ACI >ADMAOIL AFTA$ACTO RDFOOD G> MARICO
/4'4')2' .-1.()32 0-2.')00 /02'/)/0 /-//0)// '2(-(-)010/0()'2 04/'3)00 41312)/' 4-.31)1. 42.-3()'2
Lo5 ? 0ue
.(24/)33 02/.')23 .4''0)44 .4/(0).3 /.334)(3 .1(32)(' .1-4()/2 .1./()30 .1.'4)24 .04(.)2( .-2223)33
C0osi'. ? 0ue
.(24/)33 .-0.')00 /'22-)..1'2/)0/ ///01)43 '(2/(1)04 0-((()-4 /3010)2/ /11..)3( 4.''1)32 0(23'-)'/
26
Ris2 Free Asse!
Initial 5alue Ending 5alue .1./(3)//30.'3)(0
>or!&o0io ? 0ue
+igh Total #ortfolio 5alue '30'223)'Low '('-4..)31 ,losing ''3-02')33
=u r!er 3 Ris2% Asse!
%ame *eigh t ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( Amount to &e Invested /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 /0.1')/ 0 Initial #rice '3)/( 3/)(( 32)'( '/)2( '.-)' ( 202). ( '(0)' ( '-)-( '41)( 0'')2 ( %o) of $hares ./'1)/ 3 33/-)3 3../)( 20-')0 ' 241)13 '//).2 /23)2. 3121)3 2'/)43 -3).( +igh Low ,losing
SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
'.).( 30)1( 31)'( 3.)/( '-/)(( 2-')'( '34)'( 30)'( 33')2( 11-)/(
'()4( 2')1( 3')-( '/)'( '.3)( ( 24'). ( -0)/( '-)1( '44)( /-3)1
'.).( 3.)1( 33)'( '4)(( '0').( 3(1)/( -1).( 3').( '-0).( 4.-)/(
? 0ue o& Ris2% Asse!
@i.) ? 0ue SI$L CLC FC1ANGFOOD ADID>I>ES ACI >ADMAOIL AFTA$ACTO RDFOOD
0/(00)40 0(/.1)32 014(4)(' -(...)22 4210-)3. 0(410)1. 0400()40 4.(41)12
Lo5 ? 0ue
.12.1)33 4'1..)// /2/.4)./ //4.2)3. /24-')-0 /443.)-0 /'24')(4 /0'-4)42
C0osi'. ? 0ue
0/(00)40 /0(3-)4' /.(20).4 034/4)30''.')(' 23.(0)'1 /3213)/3 0(421)-4
27
G> MARICO
0-104)-' 13'10)(1 4'23'/)--
/0'0/)1/ /.443)3. //-/(4)34
03((0)/0-3/()00 /4/1'0)'/
Ris2 Free Asse!
Initial 5alue Ending 5alue /100//)01 020/3').'
>or!&o0io ? 0ue
+igh Total #ortfolio 5alue '230(.()-2 Low ''43223)3' ,losing ''110.')(-
=u r!er Ris2% Asse!
%ame *eight Amount to &e Invested /-.23 /-.23 /-.23 /-.23 /-.23 /-.23 /-.23 /-.23 /-.23 /-.23 Initial #rice '.).( 3.)1( 33)'( '4)(( '0'). ( 3(1)/ ( -1).( 3').( '-0). ( 4.-)/ ( %o) of $hares .'34)32 32-0)./ 301-)32 2.-0)(( 201)32 31/)(/ 0(2)-1 3444)3( 2(3)0' 4-)2( +igh Low ,losing
SIBL ULC FUWANGFOOD AZIZPIPES ACI PADMAOIL AFTABAUTO RDFOOD GP MARICO
()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'( ()'(
'/)'( 24)2( 30)/( 32)4( '12)(( 22/)'( ''2)(( 3-).( 3'/)2( 1-.)1(
'3)1( 31)3( 33)'( '0)-( '/()( ( 2/')' ( 10)4( 3').( '-0)0 ( 424)1 (
'/)(( 2/)'( 32)2( 33)-( '4')/( 22-)2( -2).( 34)(( 3'()(( 1-.)1(
? 0ue o& Ris2% Asse!
@i.) ? 0ue SI$L CLC FC1ANGFOOD ADID>I>ES ACI >ADMAOIL AFTA$ACTO RDFOOD
0323')'' 1-214)42 4'30.)01 131//)31 0421/)4-//'1)10 013/()33 1'0.-)0.
Lo5 ? 0ue
/3131).04/1()(( /-.23)(/ /-(13)./ //32.)3/ '(((4-)//320/).. /-.23)(/
C0osi'. ? 0ue
0'-(1)21.''/)/2 030/-)'2 1((/1).4 02'/')'0 -04'0)(/ /0.'3)'2 4.-1.)24
28
G> MARICO
0/'/')22 4(-/2)4' 4/.421)2.
/-.-3)/1 /1/(.)2( 03.(2')3(
02/.4)/' 4(-/2)4' 4'./(0)./
Ris2 Free Asse!
Initial 5alue Ending 5alue /-.23()/. 0/'42')-'
29
>or!&o0io ? 0ue
Total #ortfolio 5alue +igh '.(0.4()3/ Low '34/402)'' ,losing '200321)20
Dynamic allocation
In this strate3y, the mana3er replicates an option throu3h continuously revisin3 the proportions of a portfolio consistin3 of the underlyin3 asset /stock<+ond1 and the risk less asset /+ond<5%+ill1 to insure portfolio;s value. 5his strate3y re.uires +uyin3 more stock 4hen the market is 3oin3 up and sellin3 off some stock as the market 3oes do4n. 5he proportions allocated to the underlyin3 risky asset I the risk less asset chan3e every period, so this strate3y re.uires a si3nificant amount of tradin3. 5he no. of units of the underlyin3 risky asset that must +e held lon3 at any 3iven moment 4ill +e 3iven +y the call option;s 8DeltaF. 5he amount of risk less asset to hold is determined +y su+tractin3 the value of the units held in the underlyin3 asset from the total value of the insured portfolio.
Assu#6!io's:
In this analysis there have to invest in securities considerin3 the market scenario. It 4as not possi+le to apply our theoretical kno4led3e in practical applications in ri3id and structured form .For simplicity I have taken some assumptions for analytical purpose$ • 5otal amount of investment at the initial period is 5k. !(((((( and the distri+ution initially is "(?%"(? of our total fund in e.uity and 5%Bills respectively. • • 5he fund 4ill +e e.ually distri+uted amon3 " securities. 5here are considered 5% Bill as risk free asset
• 5ime period is considered as .uarterly I'i!i 0 I'ves!#e'! 5%Bill 5J. "((((( Investment in *tock 5k. "((((( 5otal mount 5k !(((((( 5he amount of e.uity 4ill +e e.ually distri+uted amon3 " securities.
30
Delta: Delta is the no. of shares that an investor 4ill +uy for each option shorted. *o
here delta 4ill determine ho4 much to +uy<sell in e.uity securities and 5%Bill. De0! E :I'sured ? 0ue i' @i.) - I'sured ? 0ue i' Lo5;F :,008 i' ris2% sse! i' )i.) - ,008 i' ris2% sse! i' 0o5;
Ti#e >eriod 0
'((= ;isky Asset E?uity T- ill "elta '>(((>((()(( /((((()(( /((((()(( ()/( %ew #ortfolio E?uity T- ill Total /((((()(( /((((()(( '(((((()(( Insured #ortfolio '(((((()((
*o, here the ta+le defines the picture for first period. 5he initial delta 4as ." 4hile it has reduced to %.!" in .uarter !. *o, this difference amount of shares is sold. 7ith the money provided +y sellin3 off the e.uity is used to +uy 5%Bill. 5he ultimate portfolio is found out +y su+tractin3 sold amount of shares from initial shares and addin3 the ne4 amount of 5%Bill to initial t%+ill.
,s! =u r!er
'((= ;isky Asset E?uity T- ill "elta uy $hare $ell T- ill .3-(//)'1 3'./34)//2--/()(( ')(/ 32.12')'4 32.12')'4 %ew #ortfolio E?uity T- ill Total ..-2/1)40 2(/''1)12 4/..44)/Insured #ortfolio 4/..44)/-
5he ta+le defines the picture for second period. 5he delta has increased to .'0 in .uarter '. *o, this difference amount of shares is +ou3ht. 5o +uy the shares 4e need money and this money is provided +y sellin3 off this amount of 5%Bill. 5he ultimate
31
portfolio is found out +y addin3 +ou3ht amount of shares to initial shares and su+tractin3 the sold amount of 5%Bill from initial t%+ill.
+'d =u r!er
'((= ;isky Asset E?uity T- ill "elta uy $hare $ell T- ill 4(1'/2)'/ 4.'00.)(2333(/).')3( '(.414)(33' '(.414)(33' %ew #ortfolio E?uity T- ill Total 1.0./')''(3 3'4.'1).04/ '(0210-)/1 Insured #ortfolio '(0210-)/1
*o, here the ta+le defines the picture for third period. . 5he delta has increased to .&in .uarter 0. *o, this difference amount of shares is +ou3ht. 5o +uy the shares 4e need money and this money is provided +y sellin3 off this amount of 5%Bill. 5he ultimate portfolio is found out +y addin3 +ou3ht amount of shares to initial shares and su+tractin3 the sold amount of 5%Bill from initial t%+ill.
3rd =u r!er
'((= ;isky Asset E?uity T- ill "elta $ell $hare uy T- ill 0-10.-)3/ 12/(-')'0 323024)40 ()13'(/4()2. 3'(/4()2. Insured #ortfolio '(04431)-3
%ew #ortfolio E?uity T- ill Total
03./3()13 ..23(1)'( '(04431)-3
32
-!) =u r!er
'((= ;isky Asset E?uity T- ill "elta 0(/423)-4 /.'.02)'.41110)2/ ()2' ,losing #ortfolio E?uity T- ill Total /.'.02)'.41110)2/ '(3(2.-)/. Insured #ortfolio '(3(2.-)/.
33
CONCLUSION
• In each period 4hen the e.uity value is increasin3, the delta is increasin3 and 4hen the e.uity value is decreasin3, the delta is decreasin3. It indicates that dynamic allocation strate3y has .uite successfully captured the stock price movement, • • ny violation of such +ehavior may +e related to sudden chan3e in market or effect of multiplier, n investor must look for every possi+le situation +efore en3a3in3 in dynamic asset allocation.
34
BIBLIOGRAPHY
1e"si!e 444.dse+d.or3 444.+an3ladesh%+ank.or3 >erso'
Dr. Mahmod Osman Imam Professor, Department of Finance, University of Dhaka.
35
