Portfolio Evaluation and Stock Valuation Assignment
Overview
You have already created a hypothetical portfolio of 4–5 stocks at the beginning of the course. In
this assignment, you are required to evaluate the performance of your portfolio and value one
selected stock from the portfolio using standard financial models. All calculations must be
supported by appropriate discussion and justification.
Part 1: Portfolio Return and Risk Analysis
First, calculate periodic returns (weekly data is recommended) for each stock in your portfolio
and then compute the overall portfolio return using the assigned weights. Portfolio risk should be
measured using the standard deviation of portfolio returns. Briefly explain the return–risk
characteristics of individual stocks and comment on whether diversification has reduced overall
portfolio risk.
Formulas
● Individual stock return:
𝑃𝑡−𝑃𝑡−1+𝐷𝑡
𝑅𝑡 = 𝑃𝑡−1
● Portfolio return:
𝑅𝑝 = ∑𝑤𝑖𝑅𝑖
● Portfolio risk (standard deviation):
σ𝑝 = 𝑉𝑎𝑟(𝑅𝑝)
Part 2: Beta Estimation
Next, estimate the beta of each stock using the DSE-30 index as the market proxy. After
estimating individual stock betas, calculate the portfolio beta as a weighted average and
interpret whether the portfolio is aggressive or defensive relative to the market.
Formulas
● Individual stock beta:
𝐶𝑜𝑣(𝑅𝑖,𝑅𝑚)
β𝑖 = 𝑉𝑎𝑟(𝑅𝑚)
● Portfolio beta:
β𝑝 = ∑𝑤𝑖β𝑖
Part 3: Portfolio Performance Evaluation
Evaluate the performance of your portfolio using both the Sharpe Ratio and the Treynor Ratio.
In both cases, use the 14-day Treasury Bill rate as the risk-free rate. Briefly explain what your
calculated ratios indicate about portfolio performance.
Formulas
● Sharpe Ratio:
𝑅𝑝−𝑅𝑓
𝑆ℎ𝑎𝑟𝑝𝑒 = σ𝑝
● Treynor Ratio:
𝑅𝑝−𝑅𝑓
𝑇𝑟𝑒𝑦𝑛𝑜𝑟 = β𝑝
Where:
● 𝑅𝑝= Portfolio return
● 𝑅𝑓= Risk-free rate (14-day T-bill)
● σ𝑝= Standard deviation of portfolio returns
● β𝑝= Portfolio beta
Part 4: Stock Selection for Valuation
From your existing portfolio, select one dividend-paying stock for valuation using the
Dividend Discount Model (DDM).
Part 5: Required Rate of Return (CAPM)
Estimate the required rate of return for the selected stock using the Capital Asset Pricing Model
(CAPM). Use the 14-day Treasury Bill rate as the risk-free rate, the DSE-30 index as the
market proxy, and the beta of the selected stock that you previously calculated. Briefly explain
how the required return reflects the stock’s risk.
Formula
● CAPM:
𝑅𝑒 = 𝑅𝑓 + β(𝑅𝑚 − 𝑅𝑓)
Part 6: Dividend Growth Assumption
In this part, you need to develop and justify the dividend growth assumptions used in the
multi-stage Dividend Discount Model. Growth rates should be based on informed forecasting
rather than arbitrary choice. Since dividends are paid from earnings, the analysis should begin
with an assessment of the company’s earnings growth trend, using historical growth in revenue,
profit, and earnings per share to understand the firm’s growth capacity. Students should then
examine the company’s dividend policy, focusing on dividend stability and payout behavior.
Finally, company-specific, industry, and macroeconomic factors should be considered when
forecasting future growth. Expansion plans, competitive position, industry outlook, and overall
economic growth in Bangladesh should guide the assumptions. Students must clearly distinguish
between the short-term growth rate during the high-growth phase and the long-term stable
growth rate, ensuring that the stable growth assumption is conservative, sustainable, and
economically reasonable.
Part 7: Stock Valuation Using DDM
In this part, you are required to value the selected stock using a multi-stage Dividend Discount
Model, recognizing that companies do not usually grow at a constant rate throughout their life
cycle. The valuation should assume an initial period of higher (or variable) growth, followed
by a stable long-term growth phase, where the Gordon Growth Model is applied.
Part 8: Interpretation and Conclusion
Compare the intrinsic value obtained from the DDM with the current market price of the stock.
Based on this comparison, conclude whether the stock is undervalued, overvalued, or fairly
valued. Briefly discuss the key assumptions and limitations of both the portfolio performance
measures and the valuation model, particularly in the context of an emerging market like
Bangladesh.