talha portfolio1

Port-Folio Management

Module Code: MBA 721

Talha Ali

University of St. Mark & St. John


Portfolio Management

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Table of Contents

Task- 1.............................................................................................................................................2

Introduction to country economy.....................................................................................................2

Task- 2.............................................................................................................................................4

International fund evaluation based on techniques of portfolio management: a case of Harbor

funds................................................................................................................................................4

Overview:.....................................................................................................................................4

Investment objective:...................................................................................................................5

Principal Investment Strategy:.....................................................................................................5

Principal Risks:.............................................................................................................................5

Risk:..............................................................................................................................................6

Dividend distribution:...................................................................................................................7

Performance:................................................................................................................................8

Portfolio Management:.................................................................................................................9

Buying and Selling Fund Shares:...............................................................................................11

Tax Information:.........................................................................................................................11

Portfolio Turnover:.....................................................................................................................12

Equity Portfolio Management Strategy:.....................................................................................12

Asset Allocation Strategy:..........................................................................................................14

Task- 3 Performance of harbor capital appreciation fund with it’s benchmark:...........................17

OUTLOOK AND STRATEGY:................................................................................................20

2


Task- 4 its analysis and evaluation using port-folio technique......................................................21

Conclusion & Recommendation:...................................................................................................26

Reference.......................................................................................................................................28

Task- 1

Introduction to country economy

Fiscal Year 2008-09 can easily be regarded as one of the most challenging years that Pakistan

has ever witnessed. Exogenous shocks such as commodity price escalation and the global

financial crisis, coupled with domestic political and economic challenges, led Pakistan to the

verge of default on its foreign debt obligations.

The ownership structure is most essential in the unit to know the portfolio management and

future leverage on the business. The financial feasibility can be easily obtained by the knowing

the types of ownership structure in the business houses. The capital structure is most important

sources of company. The capital structure refers to the proportion of different types of securities

or capital to be issue and proportionate amount that makes up the capitalization.

There are three type of capital structure that is borrowed capital, owned capital and combination

of borrowed and owned capital. For the large companies it is always feasible for choosing the

third type of capital structure that is combination of borrowed and owned capital. The third

structure holds the wide effects on the company capital. It is more beneficial, because the

borrowed capital is always had to interest which is tax free. So the huge part of tax is reduce

while paying, and it further makes the company’s net profit raised high.

Using the technique of portfolio management and risk return analysis one can understand in

more clear way that a combination of borrowed capital and owned capital helps to attain the

optimum profits.

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Task- 2

International fund evaluation based on techniques of portfolio management: a

case of Harbor funds

Harbor funds are categorized in many funds which includes the sub-classes also.

4


Overview:

Harbor Funds - Harbor Capital Appreciation Fund is an open-ended equity mutual fund launched

and managed by Harbor Capital Advisors, Inc. It is co-managed by Jennison Associates LLC.

The fund primarily invests in the growth stocks of the mid-cap and large-cap companies with a

market capitalization of least $1billion. It employs a fundamental analysis with the bottom-up

stock picking approach focusing on strong market position, unique marketing competence,

strong research and development leading to superior new product flow, and capable and

disciplined management to create its portfolio. The fund benchmarks the performance of its

portfolio against the Russell 1000 Growth Index and the S&P 500 Index.

Principal Investment Strategy:

Here we know that debt is always lower than equity, but using debt increases the risk in terms of

default to the lenders and higher volatility for equity investors thus, using more debt can increase

the value for some firms and decrease value for others, and for the same firm debt can be

beneficial up to a point and destroy value beyond that point. So here we have to find out that

peak point where the debt is beneficial for the company and going beyond that point it can

destroy the value of the firm. In this way it represents the value of the investors/shareholders. In

our study we explore two ways to find an optimal mix. The first approach is to choose the debt

ratio that minimizes the cost of capital. The second approach is to view leverage as a way of

maximizing the return differential between the returns made by equity investors on the

investments taken by the firm and the cost of equity (Donaldson, 2004).

The cost of capital is the weighted average of the cost, of the different components of financing

including debt, equity, and hybrid securities use by a firm to fund its financial requirements. By

altering the weights of the different components, firms might be able to change their cost of

capital. In the cost of capital approach we estimate the of debt and equity at different debt ratios,

use this cost to compute the cost of capital, and look for the mix of debt and equity that yields the

lowest cost of capital for the firm. At this cost of capital, we will argue that firm value is

maximized (Downs, 2001).

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Risk:

The company is using the full cost plus profit pricing techniques but instead of that they should

start using the market skimming pricing methods. This pricing technique helps to gain more

customer, as the prices are high in the initial stage and with time pricing will be falling, so the

customer should be increasing. The costs at initial stages are high, so price set high that will not

make any burden on company. The production will increase when prices start falling in the

markets so with increasing in the production the cost per unit will also decrease. The variable

cost will only increase with production but the fixed cost remains same; so over all the cost will

drop. The market skimming pricing helps, to crab customer, no financial burden created on

company and cost is maintained as well. There are various costing concepts but combination of

variable cost and fixed is better because there are 5 improved products in the company, so each

product had different cost per unit. The combined cost is better in unit. Cost factor looks to what

are futures expenses that will incur in the product such as marketing cost, advertising cost etc.

apart the investment of product can be recognized when the total cost if analyses it is known that

much of investment is needed in the unit.

The research report of the Harbor Funds hold the theory of portfolio theory which was useful in

order to acknowledge that how the profits and risk are inter linked with each other as there

various cases of Harbor Funds investment used as one such case was harbor capital .

Port-folio theory

When many assets are held together, assets decreasing in value can often be offset by other

assets increasing in value, thus the decreasing risk the total variance of the portfolio is therefore

almost always lower than a simple weighted average of the individual variances. If the number of

assets is large enough, the total variance does in fact stem more from the covariance’s than from

the variances of the assets. It is in other words more important how the assets tend to move

together than how much each individual asset fluctuates in value.

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Dividend distribution:

Ideally this should be all the budget heads relating to the area of service for which they have

management accountability. Too frequently, budget heads such as those relating to pay or

income are not included in the range of budgets managed by the manager who is directly

responsible for the service area. This can result in financial decisions being made by others who

may not appreciate the impact on the service or have to manage the consequences.

The council's scheme of delegation should make clear any limits to the amounts the responsible

manager can commit within their budgets. If expenditure needs to be authorized by managers (or

members) at a higher level, then the budget management accountabilities need to be explicitly

stated. For example, if a budget for community care services for older people is the responsibility

of a team but the manager is only authorized to agree the cost of packages of services up to

£10,000, responsibilities will need to be clarified as both the team manager and a more senior

manager will be committing expenditure against it.

Principal Style Characteristics: Mid to large cap growth stocks

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Performance:

As of Quarter-Ended 06/30/2010

YTD 1 Year 5 Year 10 Year Since Inception

-10.83% 10.21% 0.42% N/A 4.39%

The harbor capital appreciation fund comprises of 3 sub-classes that is investor class,

institutional class and administrative class. The Fund’s average annual total returns for certain

time periods compared to the returns of a broad-based securities index. The Russell 1000®

Growth Index is an unmanaged index generally representative of the U.S. market for larger

capitalization growth stocks.

The Fund’s best and worst calendar quarters during this time period were:

Portfolio Management:

Investment Adviser: Harbor Capital Advisors, Inc. Harbor Capital Advisors employs a

‘manager-of-managers’ approach by selecting and overseeing subadvisers responsible for the

day-to-day management of the assets of the Funds. Pursuant to an exemptive order granted by

the SEC. Harbor Capital Advisors, subject to the approval of Harbor Funds’ Board of Trustees, is

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able to select subadvisers and to enter into new or amended subadvisory agreements without

obtaining shareholder approval.

Subadviser: Jennison Associates LLC. Jennison Associates LLC has subadvised the Fund since

1990.

Portfolio Manager: Spiros Segalas. Jennison Associates LLC

Buying and Selling Fund Shares:

By analysing the financial information of Habour Funds, it is revealed that the UKLPI, a

subsidiary of Habour Funds, has £ 120 million loss in 2010-11 financial years (annual report,

2010-11).

In the preparation of budgets, this subsidiary of Habour Funds should get highest allocation for

expanding their business. And the other should not get much and these should be critically

monitored for finding out the costing problem and problem of profitability.

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Portfolio Turnover:

The return from the individual stock performs the very significant job of portfolio manager in an

investment. Useful risk return analysis in the trade workplace is difficult to optimistic investor

inspiration and high confidence (Calori, 2005).

Equity Portfolio Management Strategy:

According to Battese and Coelli (2003), because the functions of risk management are not

certain regarding their location in the company, the strategies of risk managements are written

and dignified the safe mode. Therefore risk management permits having a small common method

explanation, the objective of the rule and after that an extensive explanation of every exclusions,

which can happen (Battese and Coelli, 2003). The easy rules of risk managements are the

obvious symbol of the positive Risk managements. The functions of risk management

department does not require to include a rule after and this is sure to offer a better clarification to

executives and stocks, which is received, then the strategies of risk managements is not required

at all (O’Neill and Clarke, 2000).

In the view of Crystal (2002), the experts of risk managements have not fret in relation to its

compromise and arrangement abilities. When the executives comprehend the standard at the

back of the rules of risk managements, executives can admit it and they can pursue the strategies

of risk managements employing a general vision. On the other hand Weiss, (2002) argued that

the stock market has no remembrance to consider whole features of the strategy, they require an

essential principle and when the exclusion happens, they can discuss through the function of risk

management regarding it. The policies of risk management have to be easy. The stocks require

an essential routing and stock can forever request for the data, when stocks require need. While

their associates inquire them regarding perform in their corporation, they can give details about a

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normal story; stocks are not talented to converse in relation to tons of situations to be achieved

previous to they are got into report (Weiss, 2002).

The Sharpe ratio will be the predominant measure in the analyses, but a description of other

measures is due.

Another risk measure suggested in the literature is the Treynor measure. This measure is not as

straightforward and intuitive as the Sharpe ratio and requires an understanding of CAPM, the

Capital Asset Pricing Model. The model was put forth in the 1960s and answers what the

expected return should be for an asset of certain risk.

The model states that the return of an asset should equal the risk-free rate added together with

some “risk premium” multiplied by the asset’s sensitivity to market movements, called “beta”.

The risk premium is defined as the return of a “market portfolio” minus the return of the risk-free

asset, where the market portfolio in theory is a portfolio consisting of all risky assets in the

market.

CAPM is however not a generally accepted model and the debate regarding it has raged ever

since its inception almost 40 years ago. Finding the “market portfolio” is a difficult task, as it is

supposed to include all risky assets in their relative proportion, of which only a fraction are

traded and quoted with up-to-date prices. Proxies may of course be used but it is not clear what

the scope of the proxy should be, whether the portfolio can be taken as domestic-only for a US-

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i fi

i

R RS

i f i m fR R R R


based investor or how much one would depart from the real market portfolio if the S&P 500 or

DJIA were used as proxies.

The Treynor measure and all other measures (i.e. the Jensen differential performance index

among others) based on betas, rely on a correctly defined market portfolio, but such a portfolio

does obviously not exist. With CAPM evidence being inconclusive and the market portfolio non-

existent, no beta-based performance measures will be used in the analyses.

Asset Allocation Strategy:

Harbor use Integrated Asset Allocation strategy, because The stock market along with the

investment strategies provides a clear path for the investors to understand the equity investment

risk over their transaction. The growth in the equity market encouraged the investor to invest by

using the most effective tools which can also enable the investor to manage the equity risks they

might face. Risk assessment is an approach to risk management, which uses financial

instruments to neutralize the systematic risk of price changes or cash flows. For several market

participants, portfolio investors, bank investors, pension fund investors and corporate treasurers,

hedging is an important tool, but they each have a different return for hedging. By reducing risk

exposure, hedging allows companies to focus on their core business. The evolving role of risk

management function in the organization has played a significant contribution for enhancing the

competitive advantage of investment of the firm.

Annualized Total Returns as of the Month-Ended 07/31/2010

3

Mont

h

YTD

Retur

n

1 Yr 3 Yr 5 Yr 10 YrSince

Incp.

Expens

e Ratio

Net Gross

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Harbor

Capital

Appreciatio

n Fund

-

8.38%-5.38% 8.64%

-

3.25

%

0.43

%N/A

5.15

%1.07%

1.07

%

Russell

1000®

Growth

Index

-

6.49%-1.06%

13.65

%

-

4.25

%

0.80

%

-

4.08

%

N/A - -

S&P 500

Index

-

6.69%-0.11%

13.84

%

-

6.78

%

-

0.17

%

-

0.76

%

N/A - -

As of Year-Ended 12/31:

2005 2006 2007 2008 2009

Harbor

Capital

Appreciation

Fund

13.51% 1.91% 11.83% -37.36% 41.39%

Russell

1000®

Growth Index

5.26% 9.07% 11.81% -38.44% 37.21%

S&P 500

Index4.91% 15.79% 5.49% -37.00% 26.46%

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The Russell 1000® Growth Index is an unmanaged index generally representative of the U.S.

market for larger capitalization growth stocks. The S&P 500 Index is an unmanaged index

generally representative of the U.S. stock market.

Task- 3 Performance of harbor capital appreciation fund with it’s

benchmark:

Pugliesi (2009) argued that one of the main aspects in influencing risk managements to create the

mainly is establish during return enticements. While the mainly clear return for rising stock

efficiency is frequently consideration to be supported on wage and endorsements, this is not

forever the case. Actuality, current consideration on the accurate character of best risk

management has completed that in a huge amount of cases, dividends has fewer to do among

inspiration than accomplish further significant aspects (Mount, Ilies and Johnson, 2006).

As of April 30, 2010:

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As the appreciation fund has its sub-classes, we choose an investor class.

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The graph shows the variation in the investment held by harbor with respect to its benchmark.

The Mechanisms of APV valuation:

We estimate the value of the firm in three steps. We begin by estimating the value of the firm

with no leverage. We then consider the present value of the interest tax savings generated by

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borrowing a given amount of money. Finally, we evaluate the effect of borrowing the amount on

the probability that the firm will go bankrupt, and the expected cost of bankruptcy (Ball and

Brown, 2001).

Value of unlevered firm:

The first step in this approach is the estimation of the value of the unlevered firm. This can be

accomplished by valuing the firm as if it had no debt, i.e., by discounting the expected free cash

flow to the firm at the unlevered cost of equity. In the special case where cash flows grow at a

constant rate in perpetuity, the value of the firm is easily computed.

Value of Unlevered Firm =FCFFo (1+g)/ Bu-g

Where FCFF0 is the current after-tax operating cash flow to the firm, u is the unlevered cost of

equity and g is the expected growth rate. In the more general case, you can value the firm using

any set of growth assumptions you believe are reasonable for the firm.

The inputs needed for this valuation are the expected cash flows, growth rates and the unlevered

cost of equity. To estimate the latter, we can draw on our earlier analysis and compute the

unlevered beta of the firm.

Bunlevered= (Bcurrent) / 1+(1-t)D/E

Where,

Bunlevered = Unlevered beta of the firm

Bcurrent = Current equity beta of the firm

t = Tax rate for the firm

D/E = Current debt/equity ratio

This unlevered beta can then be used to arrive at the unlevered cost of equity.

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OUTLOOK AND STRATEGY:

Given easy comparisons against last year’s weak first half, continued rigorous cost controls, and recovering revenue gains, corporate profit growth looks to be strong in the remainder of calendar 2010. A rebound in consumer spending, particularly for cars and other durable goods, also appears to be gathering momentum, spurred by sales incentives and pent-up demand. Although unemployment remains high, we believe that income growth, too, is in the early stages of recovery, as furloughs end and modest annual salary adjustments resume. Housing starts may have bottomed out, but overall weakness in the housing sector persists.

In Europe, sovereign debt issues have caused major concern. Although Greece has been the epicenter of the crisis, Spain, Ireland, Portugal, and Italy face similar issues. In Asia, there are indications that take steps to tighten lending and bank reserve requirements in light of rapidly rising real estate activity and prices.

The revenue gains of companies held in our portfolio have continued to accelerate, and we remain confident that our holdings will achieve better-than-average revenue growth for calendar 2010. Accommodative monetary policy is providing an additional tailwind for equity prices. We would view the eventual (and approaching) return to higher interest rates as another sign of overall economic strength.

Task- 4 its analysis and evaluation using port-folio technique

“HARBOR CAPITAL APPRECIATION FUND”

Portfolio Characteristics (As of Quarter-Ended 06/30/2010)

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Harbor Capital Appreciation

Fund

Russell 1000® Growth

Index

Number of Holdings 66 631

Weighted Avg. Market Cap

($Mil)60,596.00 68,262.85

Median Market Cap ($Mil) 24,672.28 4,571.66

Price/Book Ratio 4.58 4.97

Adj. Trailing P/E Ratio 19.21 17.07

Forecasted P/E Ratio 16.48 15.13

Earnings Growth Rate (%) 19.20 14.08

Proj. Earnings Growth Rate (%) 15.45 13.14

Return on Equity (%) 18.82 22.86

Beta vs. Russell 1000® Index 0.94 -

Beta vs. Russell 3000® Index 0.88 -

The harbor capital appreciation fund performed far better than Russell 1000. We calculated the

statistical analysis from July 2009- June 2010.

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Index Name: Russell 1000® Growth

Index

IndexStyle Month Return

Large-Cap Indexes 9-Jul 7.1

Large-Cap Indexes 9-Aug 2.07

Large-Cap Indexes 9-Sep 4.25

Large-Cap Indexes 9-Oct -1.35

Large-Cap Indexes 9-Nov 6.14

Large-Cap Indexes 9-Dec 3.09

Large-Cap Indexes 10-Jan -4.36

Large-Cap Indexes 10-Feb 3.44

Large-Cap Indexes 10-Mar 5.78

Large-Cap Indexes 10-Apr 1.12

Large-Cap Indexes 10-May -7.63

Large-Cap Indexes 10-Jun -5.51

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Harbor

Fund

Russell 1000 Growth

Index

Standard Deviation 14.58% 11.78%

Sharpe Ratio -0.19 -0.24

Beta 1.12 1

Alpha 0.04%

Treynor Ratio -0.02 -0.03

Jenson 0.01 0.01

Standard deviation:

As the data shows the volatility of harbor funds is more than Russell 1000, which means that its

returns are more dispersed than its mean because the Standard Deviation is a measure of

dispersion from mean.

Sharpe ratio:

The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a

result of excess risk. This measurement is very useful because although one portfolio or fund can

reap higher returns than its peers, it is only a good investment if those higher returns do not come

with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted

performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform

better than the security being analyzed.

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The numerator in its formula is the portfolio’s risk premium. -0.19 includes the total risk of the

portfolio by including standard deviation of returns. Thus -0.19 indicates the risk premium return

earned per unit of total risk.

Treynor Ratio:

T-ratio applies to all investors, irrespective of their risk preferences. Treynor predicted that

rational and risk-averse investors would prefer portfolio possibility lines with larger slopes as

that would place them on a higher indifference curve.

Harbor Fund illustrates the example of a very poor performance portfolio with a negative t-ratio

of 0.02, calculated for a period of 12 months from July 2009 to June 2010. The reason is that

Harbor Fund produced a lower average rate of return compared to the treasure bill rate of return,

for the period under consideration. Thus, such performance is most likely to be plotted below the

Security Market Line (SML).

In simple words, T-ratio indicates harbor fund’s risk premium per unit of risk. Since Harbor

Fund’s T value (-0.02) is slightly above that of Russell growth index of -0.03, we say the former

has performed better than the market in the period under consideration.

Jenson Ratio:

The Alpha indicates whether the portfolio manager is superior or inferior in market timing or

/and stock selection. A positive alpha means positive residuals (actual rate of return> expected

rate of return) and therefore, a superior manager and vice versa.

The alpha for Harbor Funds for a period of 12 months came out to be 0.04 percent which is

significantly close to zero and thus indicating poor ability of the manager to derive above-

average returns adjusted for risk. In other words, the manager seems incapable to predict

appropriate market turns, or selecting undervalued issues for portfolio, or both.

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Stan-dard Devi-ation

Sharpe Ratio

Beta Alpha Treynor Ratio

Jenson

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

Harbor FundRussell 1000 Growth Index

UBL Fund Managers is a wholly owned subsidiary of United Bank Limited, making it the first Asset Management Company to be launched by a bank in Pakistan. UBL Fund Managers has been operating since the year 2002 and ranks amongst one of the leading asset management companies in Pakistan. UBL Fund Managers has been awarded a Management Quality Rating of AM2 (High Management Quality) by JCR-VIS Credit Rating Company Limited.

UNITED STOCK ADVANTAGE FUND

Minimum investment as low as Rs.500 with subsequent investments of Rs.500 only.

Encashment within six working days (earlier for UBL account holders)

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With our Systematic Investment Plan your USF investment can be increased directly from your Bank Account on a customized basis

Tax free investment under Government regulations

Tax rebate benefit up to Rs. 60,000 for individual investors

Can be used as collateral for availing bank financing

Exemption from Zakat on submission of Affidavit

United Stock Advantage Fund (USF) is managed by UBL Fund Managers Limited, a 100% own subsidiary of United Bank Limited (UBL)

United Stock Advantage Fund (USF) Inception Date July 27, 2006 Sales Load 2.5% front-end sales load Minimum Investment Rs 500/-Management Company Rating AM2 by JCR-VIS Credit Rating Company Limited Rating 4 Star (JCR-VIS) Fund Size Rs 1,042 Million as of June 2010 Trustee Central Depository Company of Pakistan Ltd Auditor KPMG-Taseer Hadi & Co.

UNIT HOLDERS' FUND RISK MANAGEMENT-(Capital Risk)

Capital risk is the risk that the capital of the fund changes significantly and causes adverse effects on the Fund’s existence as going concern. The capital of the Fund is represented by the net assets attributable to unit holders.

Portfolio details:

USF is an open ended Equity Fund that will aim to provide investors long-term capital appreciation by investing primarily in a mix of equities that offer capital gains and dividend yield potential. This blend of equities will help to maximize the expected returns for given levels of risk tolerance while enhancing portfolio stability.

The following categories of stocks are maintained in USF’s portfolio:

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Value Stocks: Such stocks are of those companies, which are undervalued, and their share value is higher than the market quoted price of such shares.

Growth Stocks: Such stocks are of those companies with the greatest potential for long-term growth and are expected to see high growth in sales and profits in the coming few years.

Dividend Stocks: Such stocks are of those companies, which provide above average dividend yields, thereby providing a regular income stream to the Fund.

The portfolio of USF is attractive for any investor looking for a broadly diversified investment with built-in rebalancing.

“USF FUND”

Index Name:Kse-100USF(UBL)

Month Return Return9-Jul 7.88 8.839-Aug 12.29 10.369-Sep 7.76 9.359-Oct -2.04 -2.159-Nov 0.52 1.79-Dec 1.96 0.8910-Jan 2.65 0.9710-Feb 0.45 -0.0810-Mar 5.87 4.3410-Apr 2.45 0.4110-May -10.56 -10.5710-Jun 4.24 -0.43

USF KSE-100Standard Deviation 18.37% 19.31%Sharpe Ratio 0.66 1.24Beta 0.91 1Alpha -9.45%Treynor Ratio 2.03 0.039167Jenson 1.80 2.79

Beta:

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The beta of USF is positive because in that time period the USF gives good returns. The beta is the systematic risk of the market and it tells us the volatility in the market when compared with its benchmark.

Standard Deviation:Standard Deviation is a measure of dispersion from mean. The standard deviation of USF is 18.37%.

Sharpe ratio:The sharpe ratio is positive i-e, it has a better risk-adjusted performance then a risk-less security. Sharpe ratio for USF and kse-100 turned out to be 0.66 and 1.24, respectively. Portfolio for USF will be seen to be plotted below the CML, indicating inferior risk-adjusted performance and this may be due to lower standard deviation for USF comparatively.

Treynor ratio:T-ratio of 2.03 of USF compared to that of KSE-100 of 0.04 indicates a larger slope and better portfolio for all investors. This maybe due to the difference in risk premium. But we cannot call it an appropriate equity performance measure because it assumes a completely diversified portfolio, which means that systematic risk is the relevant risk measure. USF beat market portfolio and in terms of SML, it will be plotted above the line.

Jenson Ratio:The alpha for USF showed a value of negative 0.0945 indicating that manager generated a return of -9.45 percent per period, lesser than was expected during the 12 months under consideration given the portfolio’s risk level. Manager did not show the ability to generate above-average returns, casting doubts over his forecasting ability. In short, portfolio manager can be said be to ‘inferior’ in market timing and/or stock selection.

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Standard Devia-tion

Sharpe Ratio

Beta Alpha Treynor Ratio

Jenson

-100.00%

0.00%

100.00%

200.00%

300.00%

400.00%

500.00%

KSE-100USF

Conclusion & Recommendation:

Pakistan's domestic economy was shielded from the global collapse due to its lack of dependence

on international demand. However, the domestic economic problems led to a fiscal crisis in the

1HFY09. Trade deficit and Current Account Deficit rose by 20%YoY and 44%YoY during the

first half of the year, putting immense pressure on foreign exchange reserves which declined to

USD6bn - leading to a sharp depreciation in PkR parity versus USD to a weakest level of

PkR84.4/USD. Despite relative improvement in 2HFY09, the economic growth stayed under

pressure due to tight monetary policy. Fiscal Year 2009 was a very volatile period for both

International and domestic capital markets. The KSE100- index declined by 42% during the year

from 12,289 at the beginning of the year to 7,162 at year-end. The daily average trading volumes

during the year also declined to 75mn shares from 168mn shares last year.

The both international and domestic fund provides great opportunities to investors. Comparing

the risk profile of both the funds international fund is less risky than domestic fund because

Pakistani economy is more volatile than international market. The Average Sharpe ratio or the

risk premium factor per unit of risk in an investment for the USF funds is positively reflecting

the fact that both investments have lesser risk than the market portfolio.

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On the basis of relative valuation, KSE is at a substantial discount to regional and international

markets. While relative valuations signals Pakistani equities to deliver positive performance in

2010, for the market to show substantial recovery, the economy needs to come out of its somber

state and critically GDP growth should pick up pace in continuing fall in domestic interest rates

and global economic recovery should help in improving the prospects of relatively better GDP

growth in the second half of the current fiscal year. Most importantly, the government needs to

bring the domestic security situation under control as prolonged conflict and war like situation in

the tribal belt will make it extremely difficult to attract any sizeable investments inflows in the

country.

Hence due to the riskiness and volatility in Pakistani economy a better portfolio may be

recommended as:

Reference

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28


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Finance, pp. 793-805.

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Journal of Finance, pp. 383-417.

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