Welcome

Presentation on . . .

“DYNAMIC ASSET
ALLOCATION”
Prepared for. . .
Dr. Mahmood Osman Imam
Professor
Department of Finance
University of Dhaka
Portfolio Insurance: Dynamic Asset Allocation Strategy

 Portfolio insurance is a dynamic trading strategy designed to

protect a portfolio from market declines while preserving the
opportunity to participate in market advances.
 The basic dynamic trading approach involves replicating the
insured portfolio’s price action 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.
Goals of Dynamic Asset Allocation

 Reducing risk & achieving higher risk adjusted return:

 To reduce the risk or fluctuation in the value of an investor's
account while achieving higher returns than other
investments with similar risk
 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
 Reducing risk without sacrificing performance
Selected Companies

SL. No. Company Name SL. No. Company Name

01 Squire Textile Ltd 06 Bata Shoe
Squire Islamic Bank BD Ltd
02 07
Pharmaceuticals Ltd
Lafarge Surma Cement Lanka Bangla Finance
03 08
Ltd
04 Bangas Ltd 09 Singer Bangladesh Ltd.

05 Padma Oil Limited 10 Prime Insurance Ltd

Assumptions

 Total investment = Tk. 1,000,000.

 100% equity portfolio.
 Strike price = Tk. 1,126,251.86.
 Investment horizon is the year 2014.
 Continuous compounded risk free rate is assumed.
 Initially, equal investment in 10 securities.
Share Price Adjustment

Cash Dividend: Dividend Yield = D1/ P0

Stock Dividend: Capital Gain = (P1*(1+SD1)-P0)/P0
Total Return Calculation: Total Return = Dividend Yield + Capital Gain
 Covariance Matrix Standard Deviation
1st Quarter
Lafarge Weight
Islami LankaBang Singer Prime Surma SQUARE BATA Square Padma
Bank Ltd la Bangas BD Ltd Insu. Ltd PHARMA Shoe Textile Oil
Weight 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Covariance Covariance Covariance Covariance Covariance Covariance Covariance Covariance Covariance Covariance
Islami Bank Ltd 0.001408482 0.001539502 -4.516E-06 0.00041811 -0.0003483 0.0002572 3.9627E-05 -5.926E-07 1.8023E-05 -9.308E-05 0.1
0.1
LankaBangla 0.001539502 0.002362334 0.00017833 0.00050391 -0.000442 0.0002803 3.8714E-05 -6.012E-06 4.7251E-05 -1.3688E-05
0.1
Bangas -4.516E-06 0.000178333 0.00190035 4.7997E-05 -0.0001591 -0.000223 -3.469E-05 -6.702E-05 -1.0908E-05 0.00018778
0.1
Singer BD Ltd 0.000418113 0.000503907 4.7997E-05 0.00123834 -0.0002973 0.0001391 0.00015309 0.00032501 1.1025E-05 3.5975E-05
0.1
Prime Insu. Ltd -0.0003483 -0.000442 -0.0001591 -0.0002973 0.0009294 0.0001057 -5.797E-05 -0.0001578 -1.883E-05 -5.108E-05
Lafarge Surma 0.1
0.000257239 0.000280291 -0.0002235 0.00013913 0.0001057 0.0010132 0.00017792 5.785E-05 0.00013922 1.447E-05
SQUARE PHARMA 3.96272E-05 3.87136E-05 -3.469E-05 0.00015309 -5.797E-05 0.0001779 0.00035679 0.00022578 0.00012519 0.0001311 0.1
0.1
BATA Shoe -5.9259E-07 -6.0124E-06 -6.702E-05 0.00032501 -0.0001578 5.785E-05 0.00022578 0.00043823 0.00013632 7.4964E-05
Square Textile 1.80228E-05 4.72514E-05 -1.091E-05 1.1025E-05 -1.883E-05 0.0001392 0.00012519 0.00013632 0.00032936 6.6498E-05 0.1
0.1
Padma Oil -9.308E-05 -1.3688E-05 0.00018778 3.5975E-05 -5.108E-05 1.447E-05 0.0001311 7.4964E-05 6.6498E-05 0.00045059
Variance 0.000128878
SD 0.011352444
0.087935653
Price Movement in a Binomial Tree
 t
ue
Q-1 Q-2 Q-3 Q-4
Standard Deviation (σ) 0.011352444 0.01142873 0.00976724 0.0098853
Length of time (days) Δt 63 63 63 63

d  e  t
u 1.110398449 1.094954443 1.080609306 1.081622572
d 0.900577627 0.913280006 0.925403839 0.924536919
Insured Portfolio Dynamics
 fu  f d
Call Option Deltas 
su  sd
 Revising the Asset Allocation

Quarter02A
Quarter01A 100% Equity Port. 1,215,835.71
100% Equity Port. 1,110,398.45 Insured Portfolio
Insured Portfolio Equity (0.6154@1310267.83) 748,226.03
Equity (0.40540 @1110398.45) 450,150.75 T-Bill 480,558.69
T-Bill 705,588.32 Total 1,228,784.73
Total 1,155,739.07 DeltaQ2 0.8253
DeltaQ1= 0.6154 Buy Stock (0.22
Buy Stock (0.21@1110398.45) 233,189.13 @1310267.83) 255,194.83
Sell T- Bill 233,189.13 Sell T- Bill 255,194.83
Quarter00 New Portfolio New Portfolio
100% Equity Port. 1,000,000 Equity (0.6154@1143793.44) 683,339.87 Equity 1,003,420.86
Insured Portfolio T-Bill 472,399.19 T-Bill 225,363.86
Equity 500,000 Total 1,155,739.07 Total 1,228,784.73
T-Bill 500,000
Total 1,000,000
Initial Delta 0.40540 Quarter01B
Quarter02B
New Portfolio 100% Equity Port. 900,577.63
100% Equity Port. 1,014,104.70
Equity(0.40540@1,000,000.00) 405,396 Insured Portfolio
Insured Portfolio
T-Bill 693,088 Equity (0.40540 @900577.63) 365,090.29
1,098,484 T-Bill 705,588.32 Equity (0.6154@1014104.7) 624,080.64
Total
Total 1,070,678.61 T-Bill 480,558.69
DeltaQ1= 0.0565 Total 1,104,639.34
Sell Stock (0.35@900577.63) 314,182.14 DeltaQ2 0.2239
Buy T- Bill 314,182.14 Sell Stock (0.39@1014104.7) 396,986.29
New Portfolio Buy T- Bill 396,986.29
Equity (0.0565@900577.63) 50,908.15 New Portfolio
T-Bill 1,019,770.46 Equity (0.2239@1014104.7) 227,094.35
Total 1,070,678.61
T-Bill 877,544.99
Total 1,104,639.34
Revising the Asset Allocation
Quarter02C
100% Equity Port. 986,091.47
Insured Portfolio
Equity (0.0565@986091.47) 55,742.11
T-Bill 1,037,384.41
Total 1,093,126.52
DeltaQ2 0.1026
Buy Stock (0.1026 @986091.47) 101,164.52
Quarter01B Sell T- Bill 101,164.52
100% Equity Port. 900,577.63 New Portfolio
Insured Portfolio Equity (0.1026 @986091.47) 101,164.52
Equity (0.40540 @900577.63) 365,090.29 T-Bill 991,962.00
T-Bill 705,588.32 Total 1,093,126.52

Total 1,070,678.61
DeltaQ1= 0.0565
Quarter02D
Sell Stock (0.35@900577.63) 314,182.14
100% Equity Port. 822,479.54
Buy T- Bill 314,182.14
Insured Portfolio
New Portfolio
Equity (0.0565@822479.54) 46,493.40
Equity (0.0565@900577.63) 50,908.15
T-Bill 1,037,384.41
T-Bill 1,019,770.46 Total 1,083,877.81
Total 1,070,678.61 DeltaQ2 -
Sell Stock (0.0565@822479.54) 46,493.40
Buy T- Bill 46,493.40
New Portfolio
Equity (0 @635147.97) -
T-Bill 1,083,877.81
Total 1,083,877.81
 Revising the Asset Allocation
Quarter03A
100% Equity Port. 1,313,843.39
Insured Portfolio Quarter04A

Equity (0.8401@1313843.39) 1,084,305.92 100% Equity Port. 1,421,082.66

Insured Portfolio
T-Bill 229,537.47
Equity (1@1421082.66) 1,421,082.66
Total 1,313,843.39
T-Bill -
DeltaQ3 1.0000
Total 1,421,082.66
Buy Stock (0.16 @1313843.39) 229,537.47
Quarter02A
Sell T- Bill 229,537.47
100% Equity Port. 1,215,835.71 Quarter04B
New Portfolio
Insured Portfolio 100% Equity Port. 1,214,696.72
Equity (1@1331284.72) 1,313,843.39
Equity (0.6154@1310267.83) 748,226.03 Insured Portfolio
T-Bill 480,558.69 T-Bill 0 Equity (1@1214696.72) 1,214,696.72
Total 1,228,784.73 Total 1,313,843.39 T-Bill -
DeltaQ2 0.8253 Total 1,214,696.72
Buy Stock (0.22
@1310267.83) 255,194.83 Quarter03B
Sell T- Bill 255,194.83
100% Equity Port. 1,125,139.04
New Portfolio Quarter04C
Insured Portfolio
Equity 1,003,420.86 100% Equity Port. 1,216,975.78
Equity (0.8253@1125139.04) 928,569.52
T-Bill 225,363.86 Insured Portfolio
T-Bill 229,537.47
Total 1,228,784.73 Equity
Total 1,158,106.98 (0.5133@1216975.78) 624,684.95
DeltaQ3 0.5133 T-Bill 592,290.83
Sell Stock (0.33@1125139.04) 351,025.21 Total 1,216,975.78
Buy T- Bill 351,025.21
New Portfolio Quarter04D
Equity (0.5133@1125139.04) 577,544.30 100% Equity Port. 1,040,232.58

T-Bill 580562.6811 Insured Portfolio

Total 1,158,106.98 Equity

(0.5133@1040232.58) 533,961.03
T-Bill 592,290.83
Total 1,126,251.86
 Quarter04E
100% Equity Port. 1,185,297.15
Insured Portfolio
Equity
(0.3430@1185297.15) 406,559.89
Revising the Asset Allocation T-Bill 778,737.26
Total 1,185,297.15
Quarter03C
100% Equity Port. 1,095,850.98
Insured Portfolio Quarter04F
Equity (0.2239@1095850.98) 245,400.27 100% Equity Port. 1,013,154.69
T-Bill 893,796.59 Insured Portfolio
Total 1,139,196.86 Equity
DeltaQ3 0.3430 (0.3430@1013154.69) 347,514.59
Buy Stock
(0.12@1095850.98) 130,479.36 T-Bill 778,737.26
Quarter02B
Sell T- Bill 130,479.36 Total 1,126,251.86
100% Equity Port. 1,014,104.70
Insured Portfolio New Portfolio
Equity
Equity (0.6154@1014104.7) 624,080.64 (0.3430@1095850.98) 375,879.63
T-Bill 480,558.69 T-Bill 763,317.23 Quarter04G
Total 1,104,639.34 Total 1,139,196.86 100% Equity Port. 1,015,055.61
DeltaQ2 0.2239 Insured Portfolio
Sell Stock (0.39@1014104.7) 396,986.29 Equity
Buy T- Bill 396,986.29 Quarter03D (0.0890@995545.81 -
New Portfolio 100% Equity Port. 938,456.38
T-Bill 1,126,251.86
Insured Portfolio
Equity (0.2239@1014104.7) 227,094.35 Total 1,126,251.86
Equity (0.2239@938456.38) 210,153.98
T-Bill 877,544.99
T-Bill 893,796.59
Total 1,104,639.34
Total 1,103,950.58 Quarter04H
DeltaQ3 - 100% Equity Port. 867,637.57
Sell Stock
(0.4611@931988.84) 210,153.98 Insured Portfolio
Buy T- Bill 210,153.98 Equity
New Portfolio (0.0890@787485.61) -
Equity (0.00@931988.84) - T-Bill 1,126,251.86
T-Bill 1,103,950.58 Total 1,126,251.86
Total 1,103,950.58
 Revising the Asset Allocation Quarter04G
100% Equity Port. 1,015,055.61
Quarter03E Insured Portfolio
100% Equity Port. 1,065,579.62
Insured Portfolio Equity (0.0890@995545.81 -
Equity T-Bill 1,126,251.86
(0.1026@1065579.62) 109,319.32 Total 1,126,251.86
T-Bill 1,010,332.54
Total 1,119,651.86 Quarter04H
Quarter02C DeltaQ3 0.1571 100% Equity Port. 867,637.57
100% Equity Port. 986,091.47 Buy Insured Portfolio
Stock(0.05@1065579.62) 58,125.10
Insured Portfolio
Sell T- Bill 58,125.10 Equity (0.0890@787485.61) -
Equity (0.0565@986091.47) 55,742.11
New Portfolio T-Bill 1,126,251.86
T-Bill 1,037,384.41
Equity(0.1571@1065579.6 Total 1,126,251.86
Total 1,093,126.52 2) 167,444.42
DeltaQ2 0.1026 T-Bill 952,207.44
Buy Stock (0.1026 Total 1,119,651.86
@986091.47) 101,164.52 Quarter04I
Sell T- Bill 101,164.52 100% Equity Port. 1,152,554.97

New Portfolio Insured Portfolio

Quarter03F
Equity
Equity (0.1026 @986091.47) 101,164.52 100% Equity Port. 912,532.84 (0.1571@1152554.97) 181,111.66
T-Bill 991,962.00 Insured Portfolio T-Bill 971,443.31
Total 1,093,126.52 Equity Total 1,152,554.97
(0.1026@912532.84) 93,618.04
T-Bill 1,010,332.54
Quarter04J
Total 1,103,950.58
100% Equity Port. 985,167.70
DeltaQ3 0
Sell Stock Insured Portfolio
(0.1026@912532.84) 93,618.04 Equity
((0.1571@985167.70) 154,808.55
Buy T- Bill 93,618.04
T-Bill 971,443.31
New Portfolio
Total 1,126,251.86
Equity (0 @912532.84) 0
T-Bill 1,103,950.58
Total 1,103,950.58
 Revising the Asset Allocation
Quarter04M
Quarter03G 100% Equity Port. 961,323.48
100% Equity Port. 888,779.05 Insured Portfolio
Insured Portfolio Equity (0@961323.48) 0
Equity (0@860643.14) - T-Bill 1,126,251.86
T-Bill 1,103,950.58 Total 1,126,251.86
Total 1,103,950.58
DeltaQ3 0 Quarter04N
Sell Stock (0@860643.14) - 100% Equity Port. 821,709.04
Buy T- Bill -
Insured Portfolio
Quarter02D New Portfolio
Equity (0@821709.04) 0
100% Equity Port. 822,479.54 Equity (0@860643.14) 0
T-Bill 1,126,251.86
Insured Portfolio T-Bill 1,103,950.58
Total 1,126,251.86
Equity (0.0565@822479.54) 46,493.40 Total 1,103,950.58
T-Bill 1,037,384.41
Total 1,083,877.81
Quarter03H Quarter04O
DeltaQ2 -
100% Equity Port. 761,125.72 100% Equity Port. 823,250.76
Sell Stock (0.0565@822479.54) 46,493.40
Insured Portfolio Insured Portfolio
Buy T- Bill 46,493.40
Equity (0@676794.36) - Equity (0 @823250.76) 0
New Portfolio
T-Bill 1,103,950.58 T-Bill 1,126,251.86
Equity (0 @635147.97) -
Total 1,103,950.58 Total 1,126,251.86
T-Bill 1,083,877.81
DeltaQ3 0
Total 1,083,877.81
Sell Stock (0@676794.36) - Quarter04P
Buy T- Bill - 100% Equity Port. 703,688.83
New Portfolio Insured Portfolio
Equity (0@531375.89) 0 Equity (0@703688.83) 0
T-Bill 1,103,950.58
T-Bill 1,126,251.86
Total 1,103,950.58
Total 1,126,251.86