Investment and Portfolio Management - BM4320

Year 04 | Semester 01

Group Assignment

Industry- Hotel Industry

Companies selected:
Company 1- Aitken Spence Hotel Holdings PLC
Company 2- Amaya Leisure PLC
Company 3- Citrus Leisure PLC
Company 4- Tal Lanka PLC

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 Submission of Group Assignments: Cover Sheet

Declaration:

I / we certify that:

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Student ID Student Name Signature Contribution % **

* As applicable.

** For Group Assignments only: Indicate the contribution of each group member as a
percentage.

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 Table of contents
1. Introduction..............................................................................................................................1
2. Part One....................................................................................................................................2
3. Part Two...................................................................................................................................4
4. Part three...................................................................................................................................8
5. Part four..................................................................................................................................12
6. References..............................................................................................................................13
7. Appendices.............................................................................................................................14

List of tables
Table 2.1: Arithmetic mean, variance and standard deviation during conflict and post conflict
periods..............................................................................................................................................2
Table 2.2: Covariance during conflict and post conflict periods.....................................................3
Table 2.3: Correlation coefficients during conflict and post conflict periods.................................3
Table 3.1: SCL at a glance...............................................................................................................6
Table 4.1: Weights of portfolios during conflict period..................................................................8
Table 4.2: Efficient frontier during conflict period at a glance.......................................................9
Table 4.3: Efficient frontier during post conflict period at a glance..............................................10
Table 4.4: Efficient frontier at a glance.........................................................................................11
Table 7.1: Monthly rates of return during conflict period.............................................................14
Table 7.2: Monthly rates of return during post conflict period......................................................15
Table 7.3: Risk free rates during conflict period...........................................................................18
Table 7.4: The Market Model regression using excess returns during conflict period..................18
Table 7.5: Risk free rates during post conflict period....................................................................20
Table 7.6: The Market Model regression using excess returns during post conflict period..........20
Table 7.7: Regression output of Aitken Spence Hotel Holdings PLC during conflict period.......23
Table 7.8: Regression output of Aitken Spence Hotel Holdings PLC during post conflict period
.......................................................................................................................................................23
Table 7.9: Regression output of Amaya Leisure PLC during conflict period...............................24
Table 7.10: Regression output of Amaya Leisure PLC during post conflict period......................24
Table 7.11: Regression output of Citrus Leisure PLC during conflict period..............................25
Table 7.12: Regression output of Citrus Leisure PLC during post conflict period.......................25
Table 7.13: Regression output of Tal Lanka PLC during conflict period.....................................26
Table 7.14: Regression output of Tal Lanka PLC during post conflict period..............................26
Table 7.15: Efficient frontier workings- conflict period................................................................27
Table 7.16: Efficient frontier workings-post conflict period.........................................................27

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List of figures
Figure 3.1: SCL- Aitken Spence Hotel Holdings PLC during conflict and post conflict periods...4
Figure 3.2: SCL- Amaya Leisure PLC during conflict and post conflict periods...........................4
Figure 3.3: SCL- Citrus Leisure PLC during conflict and post conflict periods.............................5
Figure 3.4: SCL- Tal Lanka PLC during conflict and post conflict periods....................................5
Figure 4.1: Efficient frontier during conflict period........................................................................9
Figure 4.2: Efficient frontier during post conflict period..............................................................10
Y
List of abbreviations
AR Arithmetic Mean Return
ASPI All Share Price Index
CAPM Capital Asset Pricing Model
CML Capital Market Line
COV Covariance
EF1 Efficient Portfolio 1
EF2 Efficient Portfolio 2
EWP Equally Weighted Portfolio
MVP Minimum Variance Portfolio
PLC Public Limited Company
Ri Average Rate of Return of a Company
Rf Risk Free Rate
Rm Average Rate of Return of the Market
SCL Security Characteristic Line
SD Standard Deviation
VAR Variance

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 1. Introduction
None of us as Sri Lankans could forget the dark years which almost lasted for three decades until
peace was brought forth in 2009. The period of war not only soaked the lives of Sri Lankans in
fear but also it was a tough strike on the economy of the country while crashing the performance
of the financial market as well. But there was a remarkable difference in the financial markets
and economy after the month of May of year 2009 with restoration of peace. This study was
executed in order to examine the behavior and performance of Aitken Spence Hotel Holdings
PLC, Amaya Leisure PLC, Citrus Leisure PLC and Tal Lanka PLC, which are four public
quoted companies that belong to the industry of Hotel and Tourism. Through the analysis of the
stocks of the four companies that was taken into consideration, this study aims to identify
whether the companies behave similarly or different after the armed conflict period compared to
the period during the conflict. The following are an outline of the four companies we considered
in our study.
Aitken Spence Hotel Holdings PLC
This company operates a chain of 22 hotels and resorts not only in Sri Lanka but also in other
tourist destinations such as, India, Maldives and Oman. This chain functions in two unique
properties: Heritance Hotels and Resorts and Adaaran Resorts in order to cater a diversified
client base. Most of Aitken Spence Hotels have won awards for its eco friendliness and
remarkable performance such as the Heritance Kandalama Hotel which is situated close to two
world heritage sites which includes the Lions Rock of Sigiriya. Aitken Spence Hotel Holdings
considers itself to be the leader in the global hospitality industry (Hotels, 2020).
Amaya Leisure PLC
Amaya Resorts and Spas is a well-known chain of hotels that seems to be performing
competitively in the industry. They own three resorts in Pasikudah, Kandy and Dambulla while
owning two bungalows in Kandy and Nuwara Eliya and one Ayurveda resort in Sigiriya. Apart
from Sri Lanka they also own a hotel in Maldives as well (Amaya, 2020) .
Citrus Leisure PLC
This public quoted company functions with the vision of becoming the ultimate hospitality brand
in Sri Lanka. Citrus owns three hotels in iconic locations of the island such as in Waskaduwa,
Hikkaduwa and Colombo. The locations of all these hotels have made them significant among
rest of the resorts in the country (Citrus, 2020).
Tal Lanka PLC
Tal Lanka PLC is renowned in Sri Lanka for owning the Taj Samudra Hotel that’s located in the
most beautiful part of Colombo facing the historic Galle Face Green. The company also manages

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the operations of Airport Garden Hotel which is located in Seeduwa. Tal Lanka PLC functions as
a subsidiary of Tal Hotels and Resorts Limited (EMIS, 2020).

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 2. Part One
For the analysis, we considered stock information from May 2003 to May 2009 as the conflict
period and from May 2009 to December 2019 as the post conflict period for the selected four
companies under the hotel industry. As a serious investor in the Sri Lankan stock market, to get
an understanding on how the market has performed during the conflict and post conflict
periods, the average return, variance and standard deviation have been calculated for market
index and each company index as well as covariance and correlation coefficient between each
of the company. This discussion will be useful for the long term investors to investigate the
fluctuations in the market and compare the performances of the companies.
Table 2.: Arithmetic mean, variance and standard deviation during conflict and post conflict periods

Conflict period Post conflict period

Aitke Amay Citrus Tal ASPI Aitken Amay Citrus Tal ASPI
AR 1.99% 2.62% 1.73% 2.92% 1.65% 0.06% 0.65% 4.85% 0.51% 0.93%
VAR 0.0142 0.0322 0.0461 0.0505 0.0066 0.0145 0.0091 0.1177 0.0115 0.0027
SD 11.91 17.94 21.48 22.47 8.16% 12.04% 9.52% 34.30 10.73% 5.21%

When considering the arithmetic mean of the monthly rate of return of the selected stocks, in the
conflict period, Tal Lanka Hotels PLC has achieved the highest average return for its stocks i.e.
2.92% whereas lowest is 1.73% from Citrus Leisure PLC. In the post conflict period, the highest
arithmetic mean of 4.85% is achieved by Citrus Leisure PLC whereas the lowest of 0.06% is
achieved by Aitken Spence Hotel Holdings PLC.
The standard deviation is a measure of volatility which in turn measures the risk of a particular
stock. When considering the selected stocks, Tal Lanka PLC has recorded the highest standard
deviation and Aitken Spence has recoded recorded the lowest during the conflict period. In the
post conflict period, Citrus Leisure PLC has the highest standard deviation which can also be
identified as the highest risk stock, i.e. 34.30%, whereas Amaya Leisure PLC shows the lowest
standard deviation of 9.52%.
Therefore in conclusion, Tal Lanka and Citrus Leisure PLC have recorded the highest risk in the
conflict and post conflict periods respectively, and at the same time have recorded high returns,
even higher than the returns of the stock market index, proving the risk return tradeoff between
stocks. On the other hand, lowest risk companies have reported better returns in relative to high
risk companies. As an example, in the conflict period, adequate returns have not earned by Citrus
and Amaya Leisure PLC, even though the stocks are high risky. In the post conflict period, in
comparison, Amaya has recorded the second highest return though the stocks report the lowest
risk rate during the same period. Moreover, it is observable that the mean returns of post conflict
period have reduced further when compared with the conflict period returns except for Citrus
Leisure PLC. Thus, the discussion encourages investors to invest in Citrus Leisure PLC.

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Covariance determines the relative moment of returns of two assets. In the conflict period, the
covariance among all the stocks take positive values which means that the returns of all the
stocks move in the same direction. As per the , Citrus Leisure PLC has recorded the highest
covariance of 0.0090 and 0.0095 during both conflict and post conflict periods respectively with
the ASPI market index. The lowest positive covariance has recorded among ASPI market index
and Aitken Spence Hotels PLC during the conflict period which is only 0.0066 and among
Amaya Leisure PLC during the post conflict period which is 0.0028. In contrast, in the post
conflict period, a negative covariance between the return of Aitken Spence Hotel Holdings PLC
and Citrus Leisure PLC can be noticed which is -0.0006, which means that the returns of both
the stocks move in the opposite directions.
Table 2.: Covariance during conflict and post conflict periods

Conflict period Post conflict period

COV Aitken Amaya Citrus Tal Aitken Amaya Citrus Tal
ASPI 0.0066 0.0082 0.0090 0.0123 0.0034 0.0028 0.0095 0.0038
Tal 0.0179 0.0299 0.0209 0.0068 0.0048 0.0149
Citrus 0.0118 0.0227 -0.0006 0.0117
Amaya 0.0128 0.0037

Furthermore, correlation coefficient can be recognized as the a tool that measures how strongly
two variables are related to each other, where +1 depicts perfect positive and -1 depicts perfect
negative correlation. Returns of all the stocks denote a positive correlation between each other in
the conflict period where the highest correlation is shown between Tal Lanka PLC and Amaya
Leisure PLC which is 74.25%. Similarly, when considering returns of ASPI market index and
stocks, both the returns of Aitken Spence PLC and Tal Lanka PLC display a positive correlation
coefficient of 67% to be exact.
Table 2.: Correlation coefficients during conflict and post conflict periods

Conflict period Post conflict period

Correlation
Aitken Amaya Citrus Tal Aitken Amaya Citrus Tal
coefficients
56.07 67.36 53.32
ASPI 67.81% % 51.31% % 54.14% 57.06% % 67.83%
74.25 40.41
Tal 67.01% % 43.36% 52.95% 47.17% %
58.98
Citrus 46.04% % -1.55% 35.85%
Amaya 59.96% 32.09%
In the post conflict period, returns of ASPI market index and Tal Lanka PLC shows the highest
positive correlation which is 67.83% and also a negative correlation between the returns of
Aitken Spence PLC and Citrus Leisure PLC can be seen which is -1.55%. Thus, the discussion

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determines that the impact of market changes towards Tal Lanka PLC is higher compared to the
rest of the companies.

3. Part Two
This chapter focuses on undertaking a risk and performance analysis of the selected stocks. As
the first step, Security Characteristic Line (SCL) for each of the stocks, separately for the period
prior to 2009 and the period after 2009 were estimated using the Market model. The market
model explains that the security’s returns depend on market’s returns. As per the illustrations
below, SCL lines of all the stocks prior and after the conflict periods are upward sloping because
the beta values are positive. This means that, when the market return tends to increase, the stock
returns also tend to increase accordingly and since the company rate of return differs from one
company to company, the beta values are also different from one to the other. Therefore, beta
can be used to estimate the volatility or risk of stocks or the sensitivity of firm’s returns to the
overall stock markets returns.
Figure 3.: SCL- Aitken Spence Hotel Holdings PLC during conflict and post conflict periods

Aitken Spence Hotel Holdings PLC (Post Aitken Spence Hotel Holdings PLC
Conflict Period) (Conflict Period)
20.00% 40.00%
Closing value

Closing value

f(x)10.00%
= 1.25 x − 0.01 20.00%
R² = 0.29 f(x) = 0.99 x + 0
0.00% R² = 0.46
0.00%
-20.00% 0.00% 20.00% 40.00%
-10.00%
%

0%

0%

0%

-20.00%
00

00

00

00
.0

.0

.0
5.

0.

0.

5.
-5

10

15

-20.00%
-1

-1

-40.00%
ASPI ASPI

Figure 3.: SCL- Amaya Leisure PLC during conflict and post conflict periods

Amaya Leisure PLC Amaya Leisure PLC

(Post Conflict Period) (Conflict Period)
35.00% 60.00%
25.00% 40.00%
Closing Value

Closing Value

f(x) = 1.04 x − 0
15.00%
R² = 0.33 f(x)20.00%
= 1.23 x + 0.01
5.00% R² = 0.31
0.00%
-5.00%
-15.00% -5.00% 5.00% 15.00% 25.00% -15.00% -5.00% 5.00% 15.00% 25.00%
-15.00% -20.00%
-25.00% -40.00%
ASPI ASPI

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Figure 3.: SCL- Citrus Leisure PLC during conflict and post conflict periods

Citrus Leisure PLC Citrus Leisure PLC

(Post Conflict Period) (Conflict Period)
70.00% 60.00%
f(x) = 3.51 x + 0.02
50.00% 40.00%
Closing Value

Closing Value
R² = 0.28
30.00% 20.00%
f(x) = 1.35 x − 0.01
10.00% R² = 0.26
0.00%
-10.00% -20.00%
-20.00% 0.00% 20.00% 40.00%
-15.00% -5.00% 5.00% 15.00%
-30.00% -40.00%
ASPI ASPI

Figure 3.: SCL- Tal Lanka PLC during conflict and post
Tal Lanka
Tal Lanka
PLC (Conflict
PLC Period) conflict periods
(Post Conflict Period)
60.00%
50.00%
50.00%
40.00%
40.00%
f(x)30.00%
= 1.86 x − 0
Value

30.00% As per , during the period prior to 2009 all the

ClosingValue

R² = 0.45
f(x) = 1.4 x − 0.01
20.00%
20.00%R² = 0.46 firms except Aitken Spence Hotels PLC have
10.00%
10.00% recorded beta values more than one, where for a
Closing

0.00%
0.00%
-15.00%-10.00% given change in the market return, stocks’ returns
-5.00% 5.00% 15.00% 25.00%
-20.00%-10.00%
-20.00%0.00% 20.00% 40.00%
-20.00% are expected to change by a greater proportion. Tal
-30.00%
-30.00%
-40.00% Lanka PLC has recorded the highest beta which is
ASPI 1.86 during conflict period and also the return gain
is relatively high when compared against other
firms, which proves the positive risk return trade-
off among assets. Similarly, when taking post conflict period into account, all the stocks have
recorded high beta values which exceed one. At the same period, Citrus leisure PLC has
recorded a tremendously high beta value of 3.50, also recording a high mean return of 4.85%
which is four times higher than returns of other firms.

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Moreover, Jensen’s Alpha of each stock can be calculated through the intercept of SCL, which
gives the average firm return when the market return is zero. In other words, it is a performance
matrix which assesses the performance of an investment after considering risk involved into
account. Hence, Jensen alpha values calculated using market model can be presented as an
equation as below.

α =Ri −( R ¿ ¿ f + β (Rm−R f ))¿

As per the results estimated, in the conflict period Jensen’s Alpha has recorded positive value in
Aitken Spence Hotel Holdings PLC and Amaya Leisure PLC which means that the stocks have
been able to attain adequate returns for the level of risk that has been undertaken and on the other
hand Citrus hotels and Tal Lanka Hotels have failed to attain adequate return to the risks borne.
In the post conflict period only Citrus Leisure PLC has been able to attain adequate returns for
the risk undertaken by the company and the rest of the companies have failed.
Table 3.: SCL at a glance

Conflict Period Post Conflict Period

  Aitken Amaya Citrus Tal Aitken Amaya Citrus Tal
Beta (β) 0.9896 1.2333 1.3511 1.8553 1.2502 1.0418 3.5090 1.3962
Jensen’s Alpha (α) 0.0036 0.0059 -0.0050 -0.0014 -0.0110 -0.0033 0.0157 -0.0080
Systematic risk 0.0061 0.0128 0.0135 0.0214 0.0042 0.0029 0.0337 0.0052
Unsystematic risk 0.0080 0.0194 0.0327 0.0290 0.0103 0.0062 0.0839 0.0063
Total risk 0.0142 0.0322 0.0461 0.0505 0.0145 0.0091 0.1177 0.0115

Moreover, total risk is comprised of both systematic risk and unsystematic risk. Systematic risk
is referred to as the risk associated with the market segment that arise due to various
macroeconomic factors, and hence, cannot be diversified. Conversely, systematic or diversifiable
risk is the firm specific risk in an every investment. In the view point of total risk, throughout
the conflict period, Tal Lanka PLC has depicted the highest total risk which is 0.0505 with a
systematic risk of 0.0214 and an unsystematic risk of 0.0290. Aitken Spence has depicted the
lowest risk which is only 0.0142. Meanwhile, in the post conflict period, the highest total risk has
recorded by Citrus Leisure PLC followed by Aitken Spence which is 0.1177 and 0.0145
respectively. The lowest total risk level has experienced by Amaya Leisure PLC with a
systematic risk of 0.0029 and an unsystematic risk of 0.0062 . As per the , unsystematic risk is
comparatively higher than systematic risk in every company in both conflict and post conflict
periods, depicting that the risk associated with the firm specifications is high.

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Different economic, political, market and other related events that took place during both
conflict and post conflict periods could have also influenced the performance of stocks. Few
of such significant events are listed below.
When considering the period from 2003-2009, it was a crucial period for the tourism industry
due to the existence of civil war. Accordingly, in this period, stock returns had varied mainly
because of the fluctuations in the tourist arrivals happened due to terrorist attacks. In addition, as
per the World Travel and Tourism Council, natural disasters can also make severe destructions to
the tourism industry similar to terrorist attacks (Buultjens, Ratnayake, & Gnanapala, 2016).
Proving the above fact, in 2004, Sri Lanka was hit by Tsunami, one of the deadliest hazards in
the natural disasters history creating many casualties to the industry. Therefore, it can be
concluded that prevalence of the terrorist war and hazards like Tsunami, combined with political
instabilities of the country have resulted in high risks and varying returns.
In May 2009, thirty year long war was ended and with this, industry recorded a huge growth of
tourist arrivals by 66% in the years of 2012-2018. The opening of highway expressways
especially southern and Colombo Katunayaka expressways targeting beautiful travel destinations
have made the lives of tourists easier, and declined the travel time. Hosting of the
Commonwealth summit in Sri Lanka with the participation of governments and top business
leaders happened in 2013 and The Lonely Planet; the world’s largest travel guide publisher
announced Sri Lanka as the number one destination to visit in the world in 2013, bringing more
growth opportunities in tourism (DailyFT, 2013).
However, surprisingly, returns of stocks in the post conflict period have recorded a decline,
despite the increase of tourist arrivals in the beginning of the period as mentioned above, when
compared against conflict period. From 2009-2019, three Presidential Elections have held in the
years of 2010, 2015 and 2019 and, because of the changes in the government structure, it has
been a barrier for the industry to maintain consistent policies and implement new growth
strategies (Buultjens et al., 2016). Therefore, the political instability within the country has
negatively impacted the hospitality industry. Seasonal natural disasters like landslides and severe
hazards like heavy floods occurred in 2017 could have also been a reason for the decrease in
returns.
Furthermore, the decrement in the returns of the industry was also highly influenced by the
Easter Sunday terror attacks which took place on the 21st of April, 2019. With this, the tourist
arrivals in the first nine months of 2019 was dropped by 20.5% and further by another 10% at
the end of the year when compared to 2018. Moreover, soon after the Easter Sunday attacks,
tourism industry recorded a revenue loss of 1.5 billion dollars and a 30% sudden decline in
arrivals. Therefore, in conclusion, it can be noted that, despite the relative high performance in
2010-2018 periods, returns have further dropped in the post conflict period especially due to the
Easter Sunday terror attack took place in 2019, since firms in the hotel industry are considered to
be very aggressive to the overall environmental changes.

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 4. Part three
The minimum variance portfolio (MVP) refers to a diversified set of individually risky assets
that, when taken together as a whole result in the lowest possible risk level for the expected rate
of return which leverages the risk of each individual asset with an offsetting investment (Course,
2020; Farlex, 2012). The individual assets in a MVP are more risky when compared to the entire
portfolio. The MVP is also known as the low-risk portfolio which is a widely used risk
management tool among investors. This can be depicted in a graph on the efficient frontier,
which is a modern portfolio theory that shows investors the best possible return they can expect
from their portfolio at a given level of risk they are willing to accept. All the portfolios that lie on
the frontier are known as the optimal portfolios, where on the contrary the portfolios that plot
below the curve are considered to be less than ideal mix of investments. Hence, among the
optimal portfolios, the portfolio that has the highest possible return at the least amount of
standard deviation is called the minimum variance portfolio. The efficient frontiers developed,
describes the risk and return behavior of the stocks of the four companies that was taken into
consideration, both during the conflict period and after the armed conflict period.
Table 4.: Weights of portfolios during conflict period

  Aitken Amaya Citrus Tal

Weights of EWP 0.2500 0.2500 0.2500 0.2500
Weights of MVP 0.9123 0.0337 0.0540 0.0000
Weights of EF1 0.5283 0.3818 0.0000 0.0898
Weights of EF2 0.3088 0.4582 0.0000 0.2331

As depicted in the , an investor needed to allocate a weight of 91.23% in Aitken Spence Hotel
Holdings PLC followed by Citrus Leisure PLC and Amaya Leisure PLC respectively allocating
5.4% and 3.37% in order to achieve the lowest possible risk at MVP during the conflict period.
0% weightage is given to Tal Lanka PLC due to the high risk embedded in the company. In the
following diagram, two efficient portfolios have been calculated as EF1 and EF2 where EF1 has
the same mean return as EWP and EF2 has the same mean standard deviation as EWP. In
achieving at the EF1 and EF2 0% weightage is given to Amaya Leisure PLC and Citrus Leisure
PLC. The highest weightage of 52.83% is given to Aitken Spence Hotel Holdings PLC in
achieving EF1 and 45.82% is given to Amaya Leisure PLC in achieving EF2. Considering the
above weights, efficient frontier has been graphed as below.

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 2.92%
0.0300
0.0280 2.62%
0.0260 0.0250
0.02322.32%
0.0240
Expected return

0.0220 1.99%
0.0200
0.0177 1.73%
0.0180 1.65%
0.0160
0.0140
0.0120
0.0100
0.0500 0.1000 0.1500 0.2000 0.2500
Standard deviation

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