Market risk and beta calculation. Example company: Midas Financing Ltd.

I was assigned by a company which is “Midas Financing Ltd.” on which I calculated the market risk and beta. After collecting the data of the company I have analyzed it thoroughly and gave my best effort to present the company’s risk & return through beta.

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Describe the different selection devices with their respective advantages and disadvantages.

Different types of positions require different kinds of selection techniques. Choosing the right techniques will help to recruit the best person for the position. Choosing selection techniques will depend on the particular skills, attributes, and knowledge required for the position.

A variety of methods are available, and consideration needs to be given as to which are suitable for a particular post. The most commonly used selection techniques include assessing written applications, conducting panel interviews and checking referee reports.

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Cost Terminology: Elements of costs, Different types of costs and Cost Classification

In accounting 'Cost' is defined as the value sacrificed to achieve resources or any specific objects. A cost is usually measured by monetary terms or amounts of money that need to be paid for acquiring goods or services. It is the amount denoted on invoices as the price and recorded in accounting books as an expense or asset cost basis.

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Diferences between Management Accounting and Financial Accounting

Financial and management accounting are both necessary parts for a business system; however they serve mostly different functions. An account manager or finance manager uses accounting to work out operational plans for the future, in order to review past performance and to check current business functions. Management and financial accounting have different audiences, as investors don’t seem to be usually involved in the day-to-day operations of the business but are concerned about their investment, whereas managers need information quickly to make day to day business decisions.

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Management Functions and Organizational Behavior of the City Bank Limited, Bangladesh

1.1.      An Overview of the City Bank Ltd.

City Bank is one of the oldest private Commercial Banks operating in Bangladesh. It is a top bank among the oldest five Commercial Banks in the country which started their operations in 1983. The Bank started its journey on 27th March 1983 through opening its first branch at B. B. Avenue Branch in the capital, Dhaka city. It was the visionary entrepreneurship of around 13 local businessmen who braved the immense uncertainties and risks with courage and zeal that made the establishment & forward march of the bank possible. Those sponsor directors commenced the journey with only Taka 3.4 crore worth of Capital, which now is a respectable Taka 330.77 crore as capital & reserve. 

City Bank is among the very few local banks which do not follow the traditional, decentralized, geographically managed, branch based business or profit model. Instead the bank manages its business and operation vertically from the head office through 4 distinct business divisions namely 

• Corporate & Investment Banking; 

• Retail Banking (including Cards); 

• SME Banking; & 

• Treasury & Market Risks. 

Under a real-time online banking platform, these 4 business divisions are supported at the back by a robust service delivery or operations setup and also a smart IT Backbone. Such centralized business segment based business & operating model ensure specialized treatment and services to the bank's different customer segments. 

The bank currently has 90 online branches and 1 SME service centers and 11 SME/Agri branch spread across the length & breadth of the country that include a fully fledged Islamic Banking branch. Besides these traditional delivery points, the bank is also very active in the alternative delivery area. It currently has 140 ATMs of its own; and ATM sharing arrangement with a partner bank that has more than 550 ATMs in place; SMS Banking; Interest Banking and so on. It already started its Customer Call Center operation. The bank has a plan to end the current year with 200 own ATMs.

City Bank is the first bank in Bangladesh to have issued Dual Currency Credit Card. The bank is a principal member of VISA international and it issues both Local Currency (Taka) & Foreign Currency (US Dollar) card limits in a single plastic. VISA Debit Card is another popular product which the bank is pushing hard in order to ease out the queues at the branch created by its astounding base of some 400,000 retail customers. The launch of VISA Prepaid Card for the travel sector is currently underway. 

City Bank has launched American Express Credit Card and American Express Gold Credit card in November 2009. City Bank is the local caretaker of the brand and is responsible for all operations supporting the issuing of the new credit cards, including billing and accounting, customer service, credit management and charge authorizations, as well as marketing the cards in Bangladesh. Both cards are international cards and accepted by the millions of merchants operating on the American Express global merchant network in over 200 countries and territories including Bangladesh. City Bank also introduced exclusive privileges for the card members under the American Express Selects program in Bangladesh. This will entitled any American Express card members to enjoy fantastic savings on retail and dining at some of the finest establishment in Bangladesh. It also provides incredible privileges all over the globe with more than 13,000 offers at over 10,000 merchants in 75 countries. 

City Bank prides itself in offering a very personalized and friendly customer service. It has in place a customized service excellence model called CRP that focuses on ensuring happy customers through setting benchmarks for the bank's employees' attitude, behavior, readiness level, accuracy and timelines of service quality. 

City Bank is one of the largest corporate banks in the country with a current business model that heavily encourages and supports the growth of the bank in Retail and SME Banking. The bank is very much on its way to opening many independent SME centers across the country within a short time. The bank is also very active in the workers' foreign remittance business. It has strong tie-ups with major exchange companies in the Middle East, Europe, Far East & USA, from where thousands of individual remittances come to the country every month for disbursements through the bank's large network of 99 online branches and SME service centers. 

The current senior management leaders of the bank consist of mostly people from the multinational banks with superior management skills and knowledge in their respective "specialized" areas. The newly launched logo and the pay-off line of the bank are just one initial step towards reaching that point. 

 2.   Management Functions

2.1 Planning

2.1.1 Vision:

The vision of city bank limited is:

“The Financial Supermarket with a Winning Culture Offering Enjoyable Experiences”

  

2.1.2 Mission:

The Mission statements are:

• Offer wide array of products and services that differentiate and excite all customer segments
• Be the “Employer of choice” by offering an environment where people excel and leaders are created
• Continuously challenge processes and platforms to enhance effectiveness and efficiency
• Promote innovation and automation with a view to guaranteeing and enhancing excellence in service
• Ensure respect for community, good governance and compliance in everything we do.

2.1.3 Objectives (financial and strategic):

Here are some basic objectives of the city bank ltd.:

·      Ensure customer delight

·      Ensuring transparency

·      Ensuring effective and efficient banking

·      Consume as less time as possible in satisfying customers

·      Provide new services to customers with superior information technology platform

·      Improve human resource quality.

·      Ensure effective risk management.

·      Achieve shareholder’s confidence

                             

2.2 The Organizational Chart:

The organizational chart of the city bank ltd is as below. 

                         

2.3 Leadership Style:

The city bank limited uses a mixed style of leader ship.  But basically, as we came to identify, the leadership style is a mixture of Relationship Oriented Leadership, Transformational Leadership and Situational Leadership. In some departments of the bank, Task Oriented and Transactional Leadership does exists.

A short explanation of the leadership styles:

Relationship Oriented Leadership: A participative style, it tends to lead to good teamwork and creative collaboration. This type of leadership was identified in the Information and technology department of the bank.

Transformational Leadership: this type of leaders generally gives a brief explanation about the future of the group. They inspire to share views and values and are very much effective communicator. This type was observed in the marketing department of the bank.

Situational leadership: leadership style depending on situation that is given. This type sustains in the higher level management of the organization. 

Task oriented leadership: more like Autocracy where subordinates are bound to carry orders. This is a very effective type in the Financial Planning and Human Resource department.

Transactional leadership: is this system, subordinates are paid for performing a specific task. This type exists in the research and development department, where the research teams are paid smart incentives for finding out positions for opening new branches.

                                       

2.4 Controlling:

The board of directors provides governance, guidance and oversight to senior Management. It is responsible for approving and reviewing the overall business strategies and significant policies of the organization as well as the organizational structure. The board of directors has the ultimate responsibility for ensuring that an adequate and effective system of internal controls is established and maintained. Board members are objective capable and inquisitive with a knowledge or expertise of the activities of and risks run by the bank. This board is strong, active board, particularly coupled with effective upward communication channels and capable financial, legal, and internal audit functions. They provide an important mechanism to ensure the correction of problems that may diminish the effectiveness of the internal control system.

Generally, the senior management who are the subordinates of the board members divides the task of different business unit according to the goal that has been decided for them. And from a higher position of the organizational chart, the keep eye on the performance and supervise where needed.

In the root level the picture is totally different from other banks. Rather than designating all the employees under branch manager and assistant branch manager, there are different groups for carrying out different tasks. For example, in every branch there is an operational department, whose task is to supervise the new account openings and helping clients with the Loan transactions. Basically in these groups all employees are of same designation and under one operational manager.

At the end of the day, these group managers report to the Branch manager. So, it is clearly seen that, in The City Bank Limited, the responsibilities of branch managers are not that much heavy like other banks. What they do is, supervise if all policies of Bangladesh Bank and the Company itself are being followed or not and if any group leaders need any guidance they provide them. So, it is understood that their duties are divided amongst his sub ordinates.

                             

3. Organizational Behavior:-

1. Employee motivational tools used within the organization:

Employee motivation process in City Bank has some specialty for attaining their organizational goal. The bank uses different types of motivational tools as well as internal and external motivation.

Tools for motivating employees fall into two basic categories. The first is external or extrinsic. These tools deal with physical or monetary rewards, such as bonuses or child care. The second category is internal or intrinsic. These rewards meet a psychological or personality need of employees, such as feelings of validation or pride in a job well done.

Tool type:-

1. Internal or intrinsic motivation:

Empowerment: Empowerment is an intrinsic motivator. City Bank does empower employees by giving them individual responsibilities and the authority to make at least basic decisions. They also motivate employees by encouraging them to be as creative and innovative as possible.

Self-Improvement: City Bank self-improvement programs allow employees to receive the training or classes they need to be better at their jobs. This motivates employees in two ways. First, it shows employees the company believes they are capable of achieving with additional skills or information.

Recognition/Attention: When employees accomplish something they have achieved something recognition is appreciation for that achievement. City Bank promotes their best employee of the year to give such recognition.

Applause: City Bank physically applauds people by giving them a round of applause for specific achievements.

One-on-One Coaching: Coaching is employee development only cost is time. Time means care. City bank has training facility. Training schedule "tune- up" training sessions will continually enhance the performance of people and the productivity of business.

Career Path. Employees need to know what is potentially ahead for them, what opportunities there are for growth. This issue is a sometimes forgotten ingredient as to the importance it plays in the overall motivation of people. City bank sets career paths within organization for helping employee.

Job Titles: City Bank talks about job titles and tapping the self-esteem of people. Someone feels about the way they are perceived in the workforce is a critical component to overall attitude and morale.

On-the-Spot Praise: This too is associated with recognition but the key here is timing. When there is a reason for praising someone for any reason! Promptness equals effectiveness.

Leadership Roles: City Bank gives people leadership roles to reward their performance and also to help to identify future promotable people. Most people are stimulated by leadership roles even in spot appearances. For example, when visitors come to workplace use this opportunity to allow an employee to take the role of visitors guide.

Team Spirit: Here people like to physically see themselves as part of a group or team.

Executive Recognition: This is the secret weapon. And like any secret weapon, timing is most critical. If this is used too often the value is diminished. And if it is used only for special occasions and rare achievements the value is escalated.

Social Gatherings: Scheduled offsite events enhance bonding which in turn helps team spirit, which ultimately impacts City Bank positive work environment.

Time Off: Implement contests that earn time off. People will compete for 15 minutes or 1/2 hour off just as hard as they will for a cash award.

Outside Seminars: Outside seminars are a stimulating break. City Bank does outside seminars for most people; consider on-site seminars or workshops for the staff.

Additional Responsibility: There are definitely employees in organization who are begging for and can handle additional responsibility.

Theme Contests: Over the years contests have produced up to 170% increase in performance. But equally as important, contests helped maintain positive environments that have reduced employee turnover by 400%.

Stress Management: City Bank provides articles and books on this subject. They make sure they know it is available and encourage them to use it.

2. External or extrinsic motivation:

Life Enhancement: Some employees underperform or resist company change or instructions because of things happening in their lives. So City Bank arranges motivational program to enhance employee life by giving bonuses, ceremonial/celebration incentives etc.

Good Work Environment: City Bank provides excellently decorated office spaces. This for sure gives a positive vibe in the minds of the employees.

2. Organizational Structure:

City Bank is among the very few local banks which do not follow the traditional, decentralized, geographically managed, branch based business or profit model. Instead the bank manages its business and operation vertically from the head office through 4 distinct business divisions namely

I.           Corporate & Investment Banking;

II.         Retail Banking (including Cards);

III.        SME Banking; &

IV.        Treasury & Market Risks.

Under a real-time online banking platform, these 4 business divisions are supported at the back by a robust service delivery or operations setup and also a smart IT Backbone. Such centralized business segment based business & operating model ensure specialized treatment and services to the bank's different customer segments.

The bank currently has 90 online branches and 1 SME service centers and 11 SME/Agri branch spread across the length & breadth of the country that include a fully fledged Islamic Banking branch. Besides these traditional delivery points, the bank is also very active in the alternative delivery area. It currently has 140 ATMs of its own; and ATM sharing arrangement with a partner bank that has more than 550 ATMs in place; SMS Banking; Interest Banking and so on. It already started its Customer Call Center operation. The bank has a plan to end the current year with 200 own ATMs.

3. Organizational Culture:

The Top Level Management of City Bank ltd. stated their culture as follows:

“…This triumphant journey has been possible only because at CBL we believe in a culture that is rewarding. In line with our Vision, CBL encourages each individual to achieve their true potential. Being a part of CBL, one has the opportunity to work in his/her area of expertise or one that he/she is interested in. We are a fast growing and superior bank, not only in terms of our products and services but also in terms of our people philosophy. Whichever function one might choose, be it Core banking, Finance, Brand, HR or any other functions, we at CBL foster a Winning Culture for both our internal and external stakeholders and ensure our talents can grow and excel in both functional and leadership front.

• The Financial Supermarket with a Winning Culture Offering Enjoyable Experiences.
• Offer wide array of products and services that differentiate and excite all customer segments
• Be the Employer of choice by offering an environment where people excel and leaders are created
• Continuously challenge processes and platforms to enhance effectiveness and efficiency
• Promote innovation and automation with a view to guaranteeing and enhancing excellence in service
• Ensure respect for community, good governance and compliance in everything we do is result driven
• Accountable & Transparent, courageous & respectful, engaged & inspired focused on customer delight….”

 4. Conclusion

The City Bank Limited as per Bangladesh Bank’s ranking is the 3^rd biggest bank in our country. While working within our limited scope, we tried our best to present the information. Yet, through this assignment anyone can have a glimpse inside management of The City Bank Ltd. We tried to discuss about different managing tools, spreading its wings from planning to the culture inside the organization, from basic organizational chart to the vast banking network throughout Bangladesh. Some flaws might be there in this assignment, as we had to handle a huge amount of data from online, reference books and some stuffs of The City Bank itself. 

4.1 References

• Organizational behavior, Robbins Judge, 13^th Edition. (Chapter 7, pg# 246 and onwards)
• www.wikipedia.com (for definitions and other explanations)
• www.thecitybank.com.bd (annual report, highlights, CEO’s message, Chairman’s Message)
• Wanda Thibodeaux, Demand Media, www. smallbusiness.chron.com
•  Mr. Mabrur Hasan Chowdhury was asked several questions about the internal affairs. He is currently working as Cluster Branch Operations Manager (Dhaka Outer). And his office is in The City Bank Ltd, Dhanmondi Branch, Rd No. 27, Dhanmondi. (opposite of Meena Bazaar)

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Modern Portfolio Theory: Definition, Problem and Solution

Modern portfolio theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel memorial prize for the theory, in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics.

MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has lower overall risk than any other combination of assets with the same expected return. This is possible, intuitively speaking, because different types of assets sometimes change in value in opposite directions For example, to the extent prices in the stock market move differently from prices in the bond market, a combination of both types of assets can in theory generate lower overall risk than either individually. Diversification can lower risk even if assets' returns are positively correlated.

More technically, MPT models an asset's return as a normally or elliptically distributed random variable, defines risk as the standard deviation of return, and models a portfolio as a weighted combination of assets, so that the return of a portfolio is the weighted combination of the assets' returns. By combining different assets whose returns are not perfectly positively correlated, MPT seeks to reduce the total variance of the portfolio return. MPT also assumes that investors are rational and markets are efficient.

MPT was developed in the 1950s through the early 1970s and was considered an important advance in the mathematical modeling of finance. Since then, some theoretical and practical criticisms have been leveled against it. These include evidence that financial returns do not follow a normal distribution or indeed any symmetric distribution, and that correlations between asset classes are not fixed but can vary depending on external events (especially in crises). Further, there remains evidence that investors are not rational and markets may not be efficient. Finally, the low volatility anomaly conflicts with CAPM's trade-off assumption of higher risk for higher return. It states that a portfolio consisting of low volatility equities (like blue chip stocks) reaps higher risk-adjusted returns than a portfolio with high volatility equities (like illiquid penny stocks). A study conducted by Myron Scholes, Michael Jensen, and Fischer Black in 1972 suggests that the relationship between return and beta might be flat or even negatively correlated.

Concept

The fundamental concept behind MPT is that the assets in an investment portfolio should not be selected merely individually, each on its own merits. Rather, it is important to consider how each asset might change in price relative to how every other asset in the portfolio might change in price.

Investing is a tradeoff between risk and expected return. In general, assets with higher expected returns are riskier. The stocks in an efficient portfolio are chosen depending on the investor's risk tolerance: an efficient portfolio is said to be having a combination[clarification needed] of at least two stocks above the minimum variance portfolio. For a given amount of risk, and on a lot of assumptions about the probability distribution of returns on each asset, MPT shows how to select a portfolio with the highest possible expected return. Or, for a given expected return, MPT explains how to select a portfolio with the lowest possible risk (the targeted expected return cannot be more than the highest-returning available security, of course, unless negative holdings of assets are possible.)

Therefore, MPT is a theory of diversification. Under certain assumptions and for specific quantitative definitions of risk and return, MPT explains how to find the best possible diversification strategy.

Example Problem and Solution:

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The Capital Assets Pricing Model

The Capital Assets Pricing Model

The capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset or equilibrium price of assets if that asset is to be added to an already well-diversified portfolio, given that assets non-diversifiable risk.

The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial literature, as well as the expected return of the market and the expected return of a theoretical risk-free asset.

The model was introduced by Jack Treynor (1961, 1962), William Sharpe (1964), John Lintner (1965) and Jan Mossin (1966) independently, building on the earlier work of Harry Markowitz on diversification and modern portfolio theory. Thus this is an extension of the work of Markowitz. Sharpe, Markowitz and Merton Miller jointly received the Nobel Memorial Prize in Economics for this contribution to the field of financial economics.

Assumptions of CAPM:

1. All investors aim to maximize economic utility and they are rational and risk-averse meaning that they use the idea proposed by Markowitz.
2. Are broadly diversified across a range of investments.
3. All are price takers, i.e., they cannot influence prices.
4. Can lend and borrow unlimited amounts under the risk free rate of interest.
5. Trade without transaction or taxation costs.
6. Deal with securities that are all highly divisible into small parcels.
7. Assume all information is available at the same time to all investors.
8. Perfect Competitive Markets.

CAPM in Brief:

All investors will choose to hold a portfolio of risk assets in proportion that duplicates the market portfolio, which includes all traded assets. For simplicity we generally refer all risky assets as stocks. The proportion of each stock in the market portfolio equals the market value of the stocks. 

We consider that the market portfolio will not only be on the efficient frontier, but also in the tangency portfolio to the optimum capital allocation line [CAL] derived by each investors. As a result the CML [one of the CAL] will be the best capital allocation possible. As CML is the optimum one, therefore all investors will hold market portfolio differing only in the amount of investment.

Derivation in Simplest Form

Generally all the investors will hold Market Portfolio which is the tangency between CML and opportunity set. However, if we try to make a different strategy like: 

Market Portfolio: A market portfolio is a portfolio consisting of a weighted sum of every asset in the market, with weights in the proportions that they exist in the market (with the necessary assumption that these assets are infinitely divisible).

Richard Roll's critique (1977) states that this is only a theoretical concept, as to create a market portfolio for investment purposes in practice would necessarily include every single possible available asset, including real estate, precious metals, stamp collections, jewelry, and anything with any worth, as the theoretical market being referred to would be the world market

Now, beta can be measured form the raw data as:

Period	Market HPR	Heidelberg Return
February 28, 2003	-0.084%	-0.37%
March 31, 2003	-6.950%	-7.35%
April 30, 2003	4.941%	9.33%
May 31, 2003	0.477%	0.18%
June 30, 2003	4.896%	0.72%
July 31, 2003	-3.670%	-1.98%
August 31, 2003	-0.858%	2.39%
September 30, 2003	-0.535%	0.72%
October 31, 2003	1.571%	0.89%
November 30, 2003	14.894%	20.11%
December 31, 2003	5.135%	-2.06%
January 31, 2004	-0.692%	-1.65%
February 29, 2004	-0.767%	-0.76%
March 31, 2004	2.104%	2.30%
April 30, 2004	14.202%	9.76%
May 31, 2004	6.621%	2.33%
June 30, 2004	11.223%	6.15%
July 31, 2004	-2.258%	-8.31%
August 31, 2004	17.388%	20.88%
September 30, 2004	7.912%	4.43%
October 31, 2004	4.742%	-9.58%
November 30, 2004	9.740%	4.45%
December 31, 2004	5.022%	8.76%
	Beta	0.967479052

The Value of Beta:

The value of beta can be any positive value or any negative value. However absolute value of beta has different meaning to the investors.

§  A higher beta means that the sensitivity of the security return with the market return is very high. Therefore it is mot likely to be a risky security. However if the value is positive then, the security will give higher return if the market return goes up and vice-versa. Moreover a security with higher beta will be considered as aggressive stock.

§  A lower beta [lower than 1] means that the sensitivity of the security return with the market return is very low. Therefore it is mot likely to be a less risky security. However if the value is negative then, the security return will go down if the market return goes up and vice-versa. Moreover, a security with lower beta will be considered as defensive stock.

§  The Beta of 1: This is the beta of market portfolio. Because theoretically the sensitivity of market returns with market return is 1. Therefore we consider that market beta is always 1. Alternatively since some security will be aggressive, some will be defensive, some will be more aggressive or defensive, some will be less aggressive or defensive, therefore sum of all of them in one portfolio, which is market portfolio, will be 1.

It is a useful tool in determining if an asset being considered for a portfolio offers a reasonable expected return for risk. Individual securities are plotted on the SML graph. If the security's risk versus expected return is plotted above the SML, it is undervalued since the investor can expect a greater return for the inherent risk. And a security plotted below the SML is overvalued since the investor would be accepting less return for the amount of risk assumed. If an asset is undervalued by CAPM it should be bought and an overvalued by CAPM then it should be sold.

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