Introduction

Origin
This report was created as a requirement of the “Financial Theory and Practices” course offered
in the second semester of the MBA program. The main purpose of conducting this report in this
course was to develop the ability to use financial theory in practice.

Background
Dhaka Stock Exchange Limited (DSE) is the largest stock exchange in the country. In the last
few years, it has attracted a lot of interest from local and international investors. Most of the
investors are retail and local with little knowledge about the market as a whole, and sound
finance knowledge. This is one of the reasons why a lot of investors are losing a lot of money.
Using the beta to get a better understanding of risk and return is one way to better understand the
stocks one is investing.

Objectives
The objectives are as follows:

• Calculate the beta of five companies in the Textile category listed in the Dhaka Stock
Exchange Limited (DSE).
• Draw the Security Market Line and plot the five companies in that graph.
• Indentify undervalued and overvalued stocks.

Methodology
We were assigned to conduct this study on the textile category of the Dhaka Stock Exchange
Limited. The textile category of the Dhaka Stock Exchange Limited is quite varied with the
products of the companies varying from detergent to animal vaccines. However, to make a more
realistic comparison, we chose five companies with relatively similar activities. The five
companies we chose have relatively the same activities. The five companies are:

• Square Pharmaceuticals Limited

• Beximco Pharmaceuticals Limited

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 • ACI Limited

• Renata Limited

• GlaxoSmithKline Limited

To find the beta of these companies, we would be required to find the returns of the market. The
ideal situation would be to use the DSI Index, which is the all-share index of the Dhaka Stock
Exchange. However, the DSI was created in 2005, which does not give us enough time to assess
the returns of these stocks over a longer period of time. The DGEN index has been used as a
substitute for the market. Nevertheless, the shortcomings of the DGEN have to be taken into
consideration.

In order to calculate the monthly returns of a stock, we have used the closing price stated by DSE
instead of the last traded price. The closing price is the average price of the last fifty trades of
any given day for any given stock. This is a better representation of the end price performance of
a stock.

The DSE is closed on Fridays and Saturdays. It is very normal that, on many month ends in a
year, the day will be a Friday or a Saturday. In such cases, we have used the immediate previous
working day closing price as the month end price.

All five of the companies that we have selected declare dividends regularly. We have adjusted
the closing prices for dividends where applicable. In the case of adjusting for dividends, we have
found three very sensitive dates. The first is the declaration date, the second is the record date
and the third is the annual general meeting (AGM) date. Although these three dates are very
sensitive, the entitlement of the dividend is only for investors holding the shares on the record
date. The AGM date is vital in the sense that, the approval of the dividends is given on that date.
But, only the shareholders on the record date are invited to the AGM, and there is not precedence
that, once a dividend declare has been changed by the shareholders.

To construct the security market line, we have taken 3% annually as the risk free rate. This is the
t-bill rate and the banks can borrow from the Government of Bangladesh.

The following methodology has been used for conducting the study:

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Sample: A random sample of 5 (five) stocks selected from the Textile sector.

Data source: Secondary data from Dhaka Stock Exchange.

Formula: The following formula has been used to calculate Beta.

1. Beta = (Covm,s/ Vars)
2. Monthly Return = (Dividend paid+ Ending Price-Beginning Price)/ Beginning Price.

Spreadsheet program: MS Excel 2003.

1.5 Methodology
The assigned industry to conduct the study is Textile category of the Dhaka Stock
Exchange Limited.

Sample size: A random sample of 5 (five) companies have been selected from the textile sector.

Sampling unit:
The chosen five companies are:

 Altex Industries Ltd

 Apex Spinning and Knitting Mills Ltd

 BEXTEX Ltd

 H.R. Textile Mills Ltd

 Monno Fabrics

Sampling method: Convenience or judgmental sampling

Data source: Secondary data from Dhaka Stock Exchange.

Time Frame: January 2005 to September 2009

In order to find the beta of the chosen companies, we determined the market return using the
DGEN index.

All five of the companies that we have selected declare dividends regularly. We have
adjusted the closing prices for dividends where applicable. In the case of adjusting for
dividends, we have found three very sensitive dates. The first is the declaration date,

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the second is the record date and the third is the annual general meeting (AGM) date.
Although these three dates are very sensitive, the entitlement of the dividend is only for
investors holding the shares on the record date. The AGM date is vital in the sense that,
the approval of the dividends is given on that date. But, only the shareholders on the
record date are invited to the AGM, and there is not precedence that, once a dividend
declare has been changed by the shareholders.

To construct the security market line, we have taken 2.5% annually as the risk free rate.
This is the t-bill rate and the banks can borrow from the Government of Bangladesh.

Scope
The study was conducted on companies listed in the Dhaka Stock Exchange Limited. There is
another bourse named the Chittagong Stock Exchange Limited (CSE). All of these five
companies are listed on the CSE, but we have not considered the price performance in the CSE.

Limitation
The limitations are given below:

• While calculating the returns of the stocks, we have used the closing price, which may
not be a representative price for calculating gains.

• The DGEN is not representative of the total market, it only reflects a portion of the
market. The most appropriate measure would be the DSI, however, it was introduced in
2005, and therefore, it cannot be used for measuring five years data.

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Beta: A measure of systemic risk

Definition of beta
Beta is statistical measure of the volatility of an investment in relation to the market as a whole;
also known as “beta coefficient” or “systematic risk.” By definition, the market has a beta of 1.0,
and individual stocks are ranked according to how much they deviate from the market. A stock
that swings more than the market over time has a beta above 1.0. If a stock moves less than the
market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a
potential for higher returns; low-beta stocks pose less risk but also lower returns.

Beta is a key component for the capital asset pricing model (CAPM), which is used to
calculate cost of equity. The cost of capital represents the discount rate used to arrive at the
present value of a company's future cash flows. All things being equal, the higher a company's
beta is, the higher its cost of capital discount rate. The higher the discount rate, the lower the
present value placed on the company's future cash flows. An asset with a beta of 0 means that its
price is not at all correlated with the market; that asset is independent. A positive beta means that
the asset generally follows the market. A negative beta shows that the asset inversely follows the
market; the asset generally decreases in value if the market goes up and vice versa.

Calculation of beta
Beta is a statistical estimate of the expected average change in an investment's rate of return that
corresponds to a one percent change in the market over the time period selected.

Beta is calculated as follows:

Where
= Beta, ¯x = Benchmark return, ¯y = Portfolio return

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Importance of beta
Beta value of a stock is the measurement of the volatility of a stock in comparison to the
volatility of the market. It is a simple and very useful indicator that all traders and investors
should be aware of. Calculation of beta value of stocks is essential with many trading/investing
strategies especially with Capital Asset Pricing Model (CAPM), which describes how much risk
that one can take to get a desirable return or vice versa.

Many financial sites, broker sites and trading platforms offer real-time and daily beta value of
stocks. When calculating the beta value, the volatility of the market is taken as 1 and the beta of
stock is calculated as how much the stock price moved in comparison to this market volatility.
The value can take one of the following forms.

• Negative beta: This is an interesting but rare condition where the price of the stock
moves in reverse direction to the market movement. Usually no stock has prolonged
negative beta value as most (all) them move with the market.

• Zero beta: This is another rarity, where the price of stock stays same over time
irrespective of market movement. This can sometimes happen in sideways moving
markets, where no major economic/industry/company news is coming up.

• Beta less than one: This happens when the stock price moves less in comparison of
market. Many blue-chip and large-cap company stocks have beta value less than one,
which make them qualify for low-risk investments. But these stocks tend to offer low-
returns; and are not so suitable for short-term trading.

• Beta of one: This happens when the stock price movement is same as that of market.
This is true for many index-linked stocks and funds.

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 • Beta greater than one: Beta exceeds one when the stock price movement surpass market
movement. Many fast growing, mid and small-cap company stocks have beta higher than
one. These stocks tend to offer better return for high-risk taken, but many of them are less
suitable for long-term investing. Remember, very high beta levels may indicate low
liquidity causing increase in volatility.

Knowledge of beta value is essential from a trader’s perspective as many experts believe that
about 70% of stock price movements are with respect to market changes. In general it is believed
that investing in instruments with high beta is good in rising markets and investing in low beta
instruments is good in falling markets.

Advantage of beta
To followers of CAPM, beta is a useful measure. A stock's price variability is important to
consider when assessing risk.

• If risk is thought as the possibility of a stock losing its value, beta has appeal as a proxy
for risk.

• It's hard not to think that stock will be riskier than, say, a safe-haven utility industry stock
with a low beta. Besides, beta offers a clear, quantifiable measure, which makes it easy to
work with.

• Sure, there are variations on beta depending on things such as the market index used and
the time period measured, but broadly speaking, the notion of beta is fairly
straightforward to understand.

• It's a convenient measure that can be used to calculate the costs of equity used in
evaluation method that discounts cash flows.

• Easy to apply and helpful in finding right trading instruments.

Disadvantages of beta
• Beta doesn't incorporate new information.

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• Another troubling factor is that past price movements are very poor predictors of the
future.

• Betas are merely rear-view mirrors, reflecting very little of what lies ahead.

• Furthermore, the beta measure on a single stock tends to flip around over time, which
makes it unreliable.

• Granted, for traders looking to buy and sell stocks within short time periods, beta is a
fairly good risk metric. But for investors with long-term horizons, it's less useful.

• As it is based on historical data there is no guarantee of future returns, not applicable for
newly issued stocks,

• It does not distinguish bearish and bullish trends and it do not consider the value of the
instrument.

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Dhaka Stock Exchange Limited

Introduction
There are two bourses in Bangladesh stock market, one is Dhaka Stock Exchange (DSE) and
another is Chittagong Stock Exchange (CSE). The regulatory framework for both the bourses is
provided by the Securities and Exchange Commission (SEC) and related by-laws and
regulations. The main institutional investors in the stock market of Bangladesh are commercial
banks, Non-bank Financial Institutions, insurance companies, Investment Corporation of
Bangladesh (ICB), Bangladesh Shilpa Rin Shangstha (BSRS), provident fund, trusts, mutual
funds and pension funds of different organizations.

DSE market Summary (31st August,2009)

Market Capitalization (bn in Tk) 1307.52

DSI Index (as of 31st March) 2471.2

DGEN Index (as of 31st March) 2941.28

No of mutual funds 18

No of listed securities 444

Current (up to 31st August, 2009) market capitalization of Dhaka Stock exchange is around USD
18.93 billion which is more than triple of the market capitalization of the year 2006. Though the
market capitalization is increasing at a faster rate, still the market capitalization is only 19.37%
of Gross Domestic Products (GDP), which is lower than those of other emerging and developed
countries.

Market Statistics and the performance of capital market

The DGEN index on the Dhaka Stock Exchange has grown at an impressive CAGR of 18.57%
from 2001 to 2008. However the benchmark DGEN index has declined 7.35% in year 2008. On
the other side the daily average market turnover has augmented significantly from BDT 1362.31
million in 2007 to 2818.42 million in 2008 per day. The market continues to be dominated by

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active local retail participation along with strong domestic institutional participation, primarily
being local commercial and merchant banks.

Major functions
The major functions of DSE are given below:

• Listing of Companies. (As per Listing Regulations).

• Providing the screen based automated trading of listed Securities.

• Settlement of trading.(As per Settlement of Transaction Regulations)

• Gifting of share / granting approval to the transaction/transfer of share outside the trading
system of the exchange (As per Listing Regulations 42)

• Market Administration & Control.

• Market Surveillance.

• Publication of Monthly Review.

• Monitoring the activities of listed companies. (As per Listing Regulations).

• Investor’s grievance Cell (Disposal of complaint bye laws 1997).

• Investors Protection Fund (As per investor protection fund Regulations 1999)

• Announcement of Price sensitive or other information about listed companies through

online.

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Beta Calculation
Based on the monthly returns of the individual stocks adjusted for their dividend, and the returns
from the DGEN, we find the following table:

Company Name Square Beximco ACI RENATA Glaxo DGEN

Covariance between share and
market 0.49% 0.47% 0.38% 0.30% 0.31% 0.46%
Variance of market 0.46% 0.46% 0.46% 0.46% 0.46% 0.46%
Beta 1.07 1.01 0.82 0.66 0.67 1.00

From the beta calculated above and from the monthly average returns we get the following table:

Company Name Square Beximco ACI RENATA Glaxo DGEN

Beta 1.07 1.01 0.82 0.66 0.67 1.00
Average Return 2.26% 3.38% 4.39% 4.06% 3.17% 1.37%

Using the beta values and the monthly average returns, we find the following graph.

From the graph above, we find that all the securities that we have analyzed are undervalued

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Conclusion
The analysis on the stocks show that the stocks are providing excess returns when compared to
the risk they possess. It is understandable why the common folk are flocking to invest in stocks
listed in the DSE.

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