Risk Diversification Through Portfolio

December 10

2013
Modern Portfolio Theory
212535 212607 212543 212576

The higher the risk, the higher the potential return of an investment. We are comparing the performance of 10 chosen companies associated with an amount of risk in 5 different sectors.

Prepared by: Sin May Yee Chan Chai Kuan Tan Wei Kian Yap Ping Way

Table of Contents
CHAPTER 1: CHAPTER 2: CHAPTER 3: CHAPTER 4: CHAPTER 5: INTRODUCTION ....................................................................................................... 2 THEORETICAL REVIEW ............................................................................................ 4 METHODOLOGY ..................................................................................................... 11 FINDINGS AND RESULTS ........................................................................................ 38 CONCLUSION ......................................................................................................... 58

References ..................................................................................................................................... 60

CHAPTER 1:

INTRODUCTION

When there was risk, there will be the opportunity. As the well knows financial theory describe, if there was high risk, there will be high return. For the investors who want to gain more return, they need to take more risk. However, risk can be divided into two types which are diversified and undiversified risk. Diversified risks are the risks that can be eliminate through the combination of asset in a portfolio. Undiversified risk as the name, it cannot be eliminate through the combination of asset in a portfolio. Although diversified risks could be eliminate through the asset combination of the portfolio, however, the total risk only will reduce as the assets in a portfolio are not perfectly correlated with each other or it will be eliminate as the assets in a portfolio are perfect negative correlated with each other. Hence, we conduct this study to understand the risk diversification through portfolio from Modern Portfolio view. Modern Portfolio Theory (MPT) was focus on statistical measurement to develop a portfolio plan. It focuses on the measurement of expected return, standard deviation of return and correlation between return. RISK-RETURN SPECTRUM: Also known as Risk and Return Tradeoff, is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. The more return sought, the more risk that must be undertaken. (Wikipedia, 2013) In other word, low levels of uncertainty or risk are associated with low potential returns, whereas high levels of uncertainty or risk are associated with high potential returns. According to the principle, invested money can only render higher profits when it is subject to the possibility of being lost. Thus,

investors must be aware of the personal risk tolerance when making decision on investment portfolio choices. COMPANIES CHOSEN FOR STUDY: We have chosen 10 companies from different sectors in the main board of Bursa Malaysia to conduct the statistical measurement of the risk and return on a portfolio. These companies including: Sectors Technology Plantations Consumer Products Construction Companies Malaysian Pacific Industries Bhd (MPI) Unisem (M) Berhad Kuala Lumpur Kepong Bhd (KLK) Kulim Malaysia Bhd (KULIM) Hup Seng Industries Bhd (HUPSENG) Oriental Holdings Bhd (ORIENTAL) Muhibbah (MUHIBBAH) Trading/ Services Ekovest Bhd (EKOVEST) Yinson Holdings Berhad (YINSON) Borneo Oil Berhad (BORNOIL) Engineering (M) Bhd

The detail of the measurement result will be presented in Excel form later

CHAPTER 2:

THEORETICAL REVIEW

Traditional portfolio analysis can be conveyed by the statement of Benjamin Graham that commitment to a single security is neither investment nor rational speculation. Traditional portfolio theory is a portfolio management practice which two parameters of investment avenues are considered, i.e. (a) returns and (b) risk. It has some characteristics as below: Low or reasonable returns can be achieved when risk is low. High returns can be achieved only when risk is high. The co-relation between securities is not considered. Risk is considered in totality, it is not subdivided into systematic and nonsystematic. Selection of securities is done by matching risk and returns. Diversification under the portfolio is generally done on the basis of class of securities equity or debt, maturity of bonds, selecting different industries.

Both investment and speculation have to be done at portfolio level. Harry Markowitz proposed modern portfolio analysis. During the 1950s, Harry Markowitz, a trained mathematician, first developed the theories that form the basis of modern portfolio theory. Modern portfolio theory (MPT) approaches investing by examining the entire market and the whole economy to make each investment opportunity unique in term of the expected long-term return rate and their expected short-term volatility. MPT is a theory 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. The founders of MPT received a Nobel Prize for revealing these four tenets.

Markets process information so rapidly when determining security prices, that it is extremely difficult to gain a competitive edge by taking advantage of market anomalies or inefficiencies.

Over time, riskier investments provide higher returns as compensation to investors for accepting greater risk.

Adding high-risk, low correlating asset classes to a portfolio can actually reduce volatility and increase expected rates of return.

Passive asset class fund portfolios can be designed to deliver over time the highest expected returns for a chosen level of risk.

MPT is a mathematical formulation of the concept of diversification in investing with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. MPT models an asset's return as a normally distributed function. The probability distribution of return on security can be described by expected value and variance (standard deviation). Expected value represents return; variance represents the risk, 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.

Two important aspects of MPT are the efficient frontier and portfolio betas. Markowitz developed mathematical procedures for finding the set of portfolios that have increasing expected return or increasing risk levels. This set of portfolios from which an investor can choose a portfolio is called efficient frontier. In order to compare investment options, Markowitz developed a system to describe each investment or each asset class with math, using unsystematic risk statistics. Then he further applied to the portfolios that contain the investment options. He looked at the expected rate of return and the expected volatility for each investment.

EFFICIENT FRONTIER: A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. The portfolio with the lowest possible variance is called minimum variance portfolio. This mean the portfolio must have the lowest possible standard deviation and thus lowest risk. For a given amount of risk, MPT describes 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 degree of curvature or bend of the efficient set for portfolio reflects the diversification effect. The lower the correlation between the securities the more the curve bend. In other word, the diversification effect rises as correlation declines.

CAPITAL ASSET PRICING MODEL (CAPM): The CAPM was introduced by Jack Treynor (1961, Mossin (1966) 1962), William independently, Sharpe (1964), John building on the Lintner (1965a,b) earlier work and Jan of Harry

Markowitzon diversification and modern portfolio theory. It is a model that describes the
relationship between risk and expected return and that is used in the pricing of risky securities. A risky investment should offer a return that exceeds what investors can earn

on a risk-free investment. The CAPM says that the expected return on a risky asset equals the risk-free rate plus a risk premium and the risk premium depends on how much of the assets risk is un-diversifiable.

E ( Ri ) R f i ( E ( Rm ) R f

Where rj = the required return on investment j, given its risk as measured by beta rrf = the risk-free rate of return; the return that can be earned on a risk-free investment bj = beta coefficient, or index of non-diversifiable risk for investment j rm =the expected market return; the average return on all securities.

Total risk = non-diversifiable risk + diversifiable risk The risk of an investment consists of two components: diversifiable and nondiversifiable risk. Diversifiable risk sometimes called unsystematic risk, results from factors that are firm-specific. Unsystematic risk is the portion of an investments risk that can be eliminated through diversification. Non-diversifiable risk, also called systematic

risk or market risk, is the risk that remains even if a portfolio is well-diversified. A careful investor can reduce or virtually eliminate diversifiable risk by holding a diversified portfolio of securities. Investors can eliminate most diversifiable risk by selecting a portfolio of as few 8 to 15 securities. CAPM links an investments beta to its return. A securitys beta indicated how the securities return responds to fluctuations in market returns. The more sensitive the return of a security is to changes in market returns, the higher that securitys beta. For stocks with positive betas, increase in market returns result in increase in security returns. Stocks that have betas less than 1.0 are, of course, less responsive to changing returns in the market and therefore less risky.

Beta 2.0 1.0 0.5 0.0 -0.5 -1.0 -2.0

Comment

Interpretation Twice as responsive as the market

Move in same direction as the market

Same response as the market One half as responsive as the market Unaffected by market movement One-half as responsive as the market

Move in opposite direction of the market

Same response as the market Twice as responsive as the market

When CAPM depicted graphically, it is called security market line (SML). For each level of non-diversifiable risk (beta), SML reflects the required return the investor should earn in the marketplace.

The x-axis represents the risk (beta), and the y-axis represents the expected return. The market risk premium is determined from the slope of the SML. The intercept is the nominal risk-free rate available for the market, while the slope is the market premium, E(Rm) Rf. The securities market line can be regarded as representing a single-factor model of the asset price, where Beta is exposure to changes in value of the Market. The equation of the SML is thus:

E ( Ri ) R f i ( E ( Rm ) R f
For individual securities, we make use of the security market line (SML) and its relation to expected return and systematic risk (beta) to show how the market must price individual securities in relation to their security risk class. The SML enables us to calculate the reward-to-risk ratio for any security in relation to that of the overall market. Therefore, when the expected rate of return for any security is deflated by its beta coefficient, the reward-to-risk ratio for any individual security in the market is equal to the market reward-to-risk ratio, thus:
E(Ri ) R f E ( Rm ) R f

It is a useful tool in determining if an asset being considered for a portfolio offers a reasonable expected return for risk. If the security's expected return versus risk 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.

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CHAPTER 3:

METHODOLOGY

MODERN PORTFOLIO THEORY (MPT): A theory explained on how risk-adverse investors can construct portfolios to optimize or maximize their expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. According to the theory, its possible to construct an efficient frontier of optimal portfolios offering the maximum possible expected return for a given level of risk. (Investopedia, 2013)

DATA COLLECTION: Firstly, we choose 10 companies from different sectors from the main board of Kuala Lumpur Stock Exchange. Next, we gather relevant information such as weekly stock prices and weekly KLCI price for year 2007 till year 2011 from datastream and exported the information to Microsoft Excel Worksheet.

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FORMULA USED IN THIS ARTICLE: (i) Expected Return - It is the amount that one would anticipate receiving on an investment that has various known or expected rates of return. The formula is as shown below: ( Where R p is the return of portfolio

( )

wi is weight of the asset i in the portfolio and

Ri is the return of an asset i in the portfolio.

(ii)

Variance - It is represents by

which is the measure of dispersion. ( )

Where -

k t is for the past rate of return of time t

k t is for the average rate of return

n is for number of year.

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To determine the riskiness of a portfolio which consists of two assets: Variance of portfolioAB:
2 2 p x 2 A (1 x) 2 B 2x(1 x)rAB A B

Where x is the fraction of portfolio invested in asset A

To determine the riskiness of a portfolio which consists of three assets: Variance of portfolioABC:
2 2 2 2 2 2 p wA 2 A wB B 2wA wB Cov( AB) wC C 2wA wC Cov( AC) 2wB wC Cov( BC)

Or in Matrix Form: Where W = Weight V = Covariance Matrix

To make things easier to understand in three-asset case, x is converted to w, which denotes weight or proportion of the portfolio allocated to each asset. See also:

rAB A COV ( A, B )

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(iii)

Standard Deviation - It is represents by

which is used to measure the

investments volatility. It is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility. ( )

Where (iv)

k t is for the past rate of return of time t

k t is for the average rate of return

n is for number of year.

Covariance, Cov - It is refers to the measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns move inversely. ( Or in Matrix Form: ( Where Xr is refers to excess return n is refers to number of sample ) ) ( )( )

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(v)

Correlation Coefficient, r - It is a statistical measure of how two securities move in relation to each other which are used in advanced portfolio management and ranges between -1 and +1. Perfect positive correlation, a correlation coefficient of +1 implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. In contrast, perfect negative correlation, a correlation coefficient of -1 implies that if one security moves, either up or down, the other security that is perfectly negatively correlated will move in the opposite direction. If the correlation coefficient is 0, they are completely moves randomly. In real life, perfectly correlated securities are rare where most securities have some degree of correlation. The formula for correlation coefficient is as below: ( )

(vi)

Beta,

- Beta of a stock or portfolio is to describe how the return of the stock

or portfolio is predicted by a benchmark. Generally, the benchmark is refers to the overall financial market and is often estimated via the use of representative indices, such as KLCI indices. In Capital Asset Pricing Model (CAPM), Beta is used to measure the volatility or systematic risk of a security or a portfolio in comparison to the market as a whole.

#1

Cov(i, M )
2 M

or

#2

ri , M i M
2 M

or

#3

ri , M i

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Table below shows the summary of interpretation of Beta. As we mentioned before, we have to compute Beta for 10 assets, thus we utilize the covariance matrix to compute Beta where formula #1 is used in the article.

Value of Beta

Interpretation

<0

Asset generally moves in the opposite direction as compared to the index

=0

Movement of the asset is uncorrelated with the movement of the benchmark

Movement of the asset is generally in the same direction as, but less than the 0<<1 movement of the benchmark

Movement of the asset is generally in the same direction as, and about the same =1 amount as the movement of the benchmark

Movement of the asset is generally in the same direction as, but more than the >1 movement of the benchmark

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DATA COMPUTATION: First, we copy the entire stock price for the 10 chosen companies to a worksheet namely KLCI. Then, we rename the date of each stock price taken to number from 0 to 521. Next, we compute the stock return for every company by using RCS log
P 1 , where P0

= Stock Price at current term and

= Stock Price at

previous term. However, in Excel, the natural logarithm function is used. For example, to compute the first term of stock return for Malaysia Pacific, we used the formula =LN(C5/C4), where C5 is the current stock price and C4 is the previous stock price. We did the same for the other 9 assets and also for KLCI price index. Next, we compute the Stock Excess Return by using a simple formula where Excess Re turn r r , where r = Actual Stock Return and r = Expected Stock Return). For example, the stock excess return of Malaysia Pacific is represented by =N5:N525-AVERAGE(N5:N525) where N5:N525 represents the values of Stock Return and AVERAGE(N5:N525) represents the average values of Stock Return (which is the expected return of a stock). The same formula applies to the rest too. Then, we named the entire Stock Excess Return as E_R for the further computation use. Now, we are going to compute a Covariance Matrix. To compute the Covariance Matrix, we simply use the Matrix Multiplication function in Excel, where the function will be =(MMULT(TRANSPOSE(RET),RET))/521. * Note: we have to press Ctrl + Shift + Enter for matrix form.

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COVARIANCE MATRIX

FTSE BURSA MALAYSIA KLCI PRICE INDEX (~M$)

MALAYSIA PACIFIC (~M$)

UNISEM (M)

KUALA LUMPUR KEPONG (~M$)

KULIM (MSIA) (~M$)

HUP SENG IND (~M$)

ORIENTAL HOLD. (~M$)

MUHIBBA H ENG. (M) (~M$)

EKOVEST (~M$)

YINSON HOLDIN GS (~M$)

BORNEO OIL (~M$)

FTSE BURSA MALAYSIA KLCI - PRICE INDEX (~M$) MALAYSIA PACIFIC (~M$) UNISEM (M) KUALA LUMPUR KEPONG (~M$) KULIM (MALAYSIA) (~M$) HUP SENG INDUSTRIES (~M$) ORIENTAL HOLDINGS (~M$) MUHIBBAH ENGINEERING (M) (~M$) EKOVEST (~M$) YINSON HOLDINGS (~M$) BORNEO OIL (~M$)

=(MMULT(TRANSPOSE(RET),RET))/521

Table 3.1:

Draft of Covariance Matrix

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To compute Beta by using the formula,

. Next, we formed another

table with the relevant information such as, Beta, Variance and Standard Deviation, Covariance between stock and market, and also Correlation Coefficient. Standard Deviation is the square root product of Variance of the respective stock and Correlation Coefficient ( rAB
Cov( AB ) ) is the product of Covariance between stock and market A . B

divided by the multiplication of Standard Deviation of stock and Standard Deviation of market. To proceed, we have to form a table concluding weightage of the stock, Variance, Stock Annual Return, and also the Portfolio Return as shown in Table 3.1. To form an investment portfolio, there are two (2) conditions: (a) Short Selling is allowed, (b) Short Selling is not allowed. Besides, we need to use the Solver Function in Excel. Solver Function is part of a suite of commands sometimes called what-if-analysis which helps to find an optimal value for a formula in one cell (called the target cell) on a worksheet. Solver works with a group of cells that are related, either directly or indirectly, to the formula in the target cell. It will adjusts the values in the changing cells that we specified (called the adjustable cell) to produce the result that we specify from the target cell formula. Thus, to use the Solver Function, we need to generate Table 3.2 first.

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ASSET MALAYSIA PACIFIC UNISEM (M) KUALA LUMPUR KEPONG KULIM (MALAYSIA) HUP SENG INDUSTRIES ORIENTAL HOLDINGS MUHIBBAH ENGINEERING (M) EKOVEST YINSON HOLDINGS BORNEO OIL TOTAL RETURNPF VARIANCEPF STANDARD DEVIATIONPF

WEIGHTAGE 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 1.00

VARIANCE 0.00707476 0.00627582 0.00129728 0.00250902 0.00090901 0.00757104 0.04610

RETURN -0.05572494 -0.08490298 0.18507246 0.20096830 0.06688487 0.05176927 9261

RETURNPF -0.0053572494 -0.0084950298 0.0185047246 0.0250096830 0.0066288487 0.0051769297 0.011582610 0.0006461940 0.0127550033 -0.0134785620

0.003794874 0.006461940 0.002957661 0.127550033 0.011073017 -0.13478562

Table 3.2: Format of Individual Stock and Portfolios Weightage, Variance, Return for 10 Stocks

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Solver Function: We named the Weightage of Stock as W_PF and Covariance Matrix as CV_PF. Next, copy the values of Variance from the Covariance Matrix. Return of individual stock is computed by =N5:N525-AVERAGE(N5:N525)*52, where N5:N525 represents the values of Stock Annual Return. There are 2 steps needed to compute Portfolios Return. First, use the formula = AK32*AM32 where AK32 is the Weightage of the Stock and AM32 is the Return of the respective Stock. Second, sum up all the values computed. Variance of Portfolio will be computed by using the formula

=(MMULT(MMULT(TRANSPOSE(WD_MIN),CV_PF),WD_MIN)), where MMULT refers to Matrix Multiplication, Transpose refers to returns a vertical range of cells as a horizontal range, or vice versa, WD_MIN is the Name of all weightage for 10 assets, and lastly CV_PF is Covariance of the 10 individual assets respondent to the market which is KLCI, whereas Standard Deviation of Portfolio will be the product of square root of Variance of Portfolio.

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SHORT SELLING ALLOWED VARIANCE 0.000401356 0.000400994 RETURN Optimal +0.002 Optimal +0.001 Minimum Value 0.000400993 0.000401356 Optimal -0.001 Optimal -0.002

Table 3.3: Format of Data to compute Investment Portfolio Table [Short Selling is allowed] To complete the Investment Portfolio Table with Optimum

-0.002, Optimum -0.001, Minimum, Optimum +0.001, and Optimum +0.002, we need to use the Excel Solver function as shown in Figure 3.1. To proceed, we have to compute for the minimum value as below. i. ii. Set Objective - Set Variance of Portfolio as the target cell to the Min. Value. By Changing Variable Cells - Variable Cells will be WD_PF (the weightage of each stock). iii. Subject to the Constraints - Set the Total Weightage always equal to 1. (Note: For short selling is allowed, uncheck the column for Make Unconstrained Variables Non-Negative) iv. Solve and copy the value to the Short Selling Allowed table (as shown in Table 3.4) and also the Investment Portfolio Table (as shown in Table 3.6).

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Figure 3.1: Print Screen of Solver Function (MIN Value) where Short Selling is Allowed

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[Short Selling is Not Allowed]

To complete the Investment Portfolio Table with

Optimum -0.002, Optimum -0.001, Minimum, Optimum +0.001, and Optimum +0.002, we need to use the Excel Solver function as shown in Figure 3.2. To proceed, we have to compute for the minimum value as below. i. ii. Set Objective - Set Variance of Portfolio as the target cell to the Min. Value. By Changing Variable Cells - Variable Cells will be WD_PF (the weightage of each stock). iii. Subject to the Constraints - Set the Total Weightage always equal to 1. (Note: For short selling is not allowed, check the column for Make Unconstrained Variables Non-Negative) iv. Solve and copy the value to the Short Selling is Not Allowed table (as shown in Table 3.5) and also the Investment Portfolio Table (as shown in Table 3.7).

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Figure 3.2: Print Screen of Solver Function (MIN Value) where Short Selling is not Allowed

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SHORT SELLING ALLOWED VARIANCE RETURN -0.0645982630 -0.0655982630 AT57 0.0004039307 -0.0665982630 -0.0675982630 -0.0685982630 = AU57+0.002 = AU57+0.001 AU57 = AU57-0.001 = AU57-0.002

Table 3.4: Partial Summary of Variance and Return of Portfolio where Short Selling is Allowed Table 3.4 shows the partial summary of Variance and return of investment portfolio which consists of 10 companies where short selling is allowed. The cell AT57 and AU57 is the minimum value obtained from Solver solution. It is the minimum return will gain from the portfolio associated with the lowest risk.

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SHORT SELLING N/A VARIANCE RETURN -0.057725455 -0.058725455 BD57 0.000414638 -0.059725455 -0.060725455 -0.061725455 = BE57+0.002 = BE57+0.001 BE57 = BE57-0.001 = BE57-0.002

Table 3.5: Partial Summary of Variance and Return of Portfolio where Short Selling is not Allowed Table 3.5 shows the partial summary of Variance and return of investment portfolio which consists of 10 companies where short selling is not allowed. The cell BD57 and BE57 is the minimum value obtained from Solver solution for the case Short Selling is not allowed. It is the minimum return will gain from the portfolio associated with the lowest risk when there is no short selling .

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INVESTMENT PORTFOLIO WHERE SHORT SELLING IS ALLOWED OPTIMUM OPTIMUM ASSET -0.002 MALAYSIA PACIFIC UNISEM (M) KUALA LUMPUR KEPONG KULIM (MALAYSIA) HUP SENG INDUSTRIES ORIENTAL HOLDINGS MUHIBBAH ENGINEERING (M) EKOVEST YINSON HOLDINGS BORNEO OIL TOTAL RETURNPF VARIANCEPF STANDARD DEVIATIONPF -0.001 0.010 -0.037 0.154 0.020 0.379 0.387 -0.031 0.044 0.085 -0.010 1.000 -0.0665982630 0.0004039307 0.0200980265 MINIMUM +0.001 +0.002 OPTIMUM OPTIMUM

Table 3.6: Partial of Investment Portfolio Table where Short Selling is Allowed

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INVESTMENT PORTFOLIO WHERE SHORT SELLING IS NOT ALLOWED OPTIMUM OPTIMUM ASSET -0.002 MALAYSIA PACIFIC UNISEM (M) KUALA LUMPUR KEPONG KULIM (MALAYSIA) HUP SENG INDUSTRIES ORIENTAL HOLDINGS MUHIBBAH ENGINEERING (M) EKOVEST YINSON HOLDINGS BORNEO OIL TOTAL RETURNPF VARIANCEPF STANDARD DEVIATIONPF -0.001 0.002 0.000 0.140 0.012 0.366 0.375 0.000 0.026 0.079 0.000 1.000 -0.0587263340 0.0004158953 0.0203935103 MINIMUM +0.001 +0.002 OPTIMUM OPTIMUM

Table 3.7: Partial of Investment Portfolio Table where Short Selling is not Allowed

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[Short Selling is Allowed]

To complete Table 3.4, Table 3.5, Table 3.6 and Table 3.7,

we are also using the Solver Function with different target cell as shown in Figure 3.3. The steps are as shown below: i. Set Objective - Set Return of Portfolio as the target cell to the Value of *. ii. * refers to the value of return from the respective cell in Table 3.4.

By Changing Variable Cells - Variable Cells will be WD_PF (the weightage of each stock).

iii.

Subject to the Constraints - Set the Total Weightage always equal to 1. (Note: For short selling is allowed, uncheck the column for Make Unconstrained Variables Non-Negative)

iv.

Solve and copy the value to the Short Selling Allowed table (as shown in Table 3.4) and also the Investment Portfolio Table (as shown in Table 3.6).

v.

Repeat Steps (i) to (iv) for the column of Optimal +0.002, Optimal +0.001, Optimal -0.001, and also Optimal -0.002.

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Figure 3.3: Print Screen of Solver Function (OPTIMAL Value) where Short Selling is Allowed

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SHORT SELLING ALLOWED VARIANCE RETURN -0.0645982630 -0.0655982630 0.0004039307 -0.0665982630 -0.0675982630 -0.0685982630

Table 3.8: Summary of Variance and Return of Portfolio where Short Selling is Allowed

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[Short Selling is Not Allowed] To complete Table 3.4, Table 3.5, Table 3.6 and Table 3.7, we are also using the Solver Function with different target cell as shown in Figure 3.4. The steps are as shown below: vi. Set Objective - Set Return of Portfolio as the target cell to the Value of *. vii. * refers to the value of return from the respective cell in Table 3.5.

By Changing Variable Cells - Variable Cells will be WD_PF (the weightage of each stock).

viii.

Subject to the Constraints - Set the Total Weightage always equal to 1. (Note: For short selling is allowed, uncheck the column for Make Unconstrained Variables Non-Negative)

ix.

Solve and copy the value to the Short Selling Allowed table (as shown in Table 3.5) and also the Investment Portfolio Table (as shown in Table 3.7).

x.

Repeat Steps (i) to (iv) for the column of Optimal +0.002, Optimal +0.001, Optimal -0.001, and also Optimal -0.002.

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Figure 3.4: Print Screen of Solver Function (OPTIMAL Value) where Short Selling is not Allowed

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SHORT SELLING N/A VARIANCE 0.0004164181 0.0004158947 0.0004146381 0.0004150221 0.0004148999 RETURN -0.0577254551 -0.0587254551 -0.0597254551 -0.0607254551 -0.0617254551

Table 3.9: Summary of Variance and Return of Portfolio where Short Selling is not Allowed

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PEARSON CORRELATION COEFFICIENT: Refers to the measurement of how well the variables are related.

Pearson's Correlation Coefficient, r

Interpretation

r = +0.70 or higher +0.40 r +0.69 +0.30 r +0.39 +0.20 r +0.29 +0.01 r +0.19 -0.01 r -0.19 -0.20 r -0.29 -0.30 r -0.39 -0.40 r -0.69 r = -0.70 or higher

Very Strong Positive Relationship Strong Positive Relationship

Moderate Positive Relationship Weak Positive Relationship No or Negligible Relationship No or Negligible Relationship

Weak Negative Relationship Moderate Negative Relationship Strong Negative Relationship Very Strong Negative Relationship

To compute, we simply used the Excel built-in function, CORREL, which is to returns the correlation coefficient of the array1 and array2 cell ranges. For example, to compute the correlation coefficient of stock return between KLCI and Malaysia Pacific, we used =CORREL(A5:A525,B5:B525), where A5:A525 is the values of stock return of KLCI and B5:B525 is the values of stock return of Malaysia Pacific.

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Table 3.9.1: Draft of Pearsons Correlation Coefficient

CHAPTER 4:

FINDINGS AND RESULTS

38

Table 4.1: Covariance Matrix

Beta of market is always equals to 1 and individual stocks are ranked according to how much they deviate from the market. A stock that is more volatile than the market over time has a beta above 1.0 whereas a stock that is less volatile than the market has a beta which is less than 1.0. High beta stocks are supposed to be riskier buy provide a potential for higher return. In contrast, stocks with low beta exposed to lower risk but also lower returns. Technology sector, plantation sector and construction sector have positive beta and the value of beta is more than 1. This shows that the companies in these sectors are expected to change by more than 1 percent in the same direction by market. The companies are Malaysian Pacific Industries Bhd, Unisem (M) Bhd, Kuala Lumpur Kepong Bhd, Kulim (Malaysia) Bhd, Muhibbah Engineering (M) Bhd and Ekovest Bhd. Among these companies, Unisem (M) Bhd and Muhibbah Engineering (M) Bhd have the highest beta which is 1.59 in value. This indicates that both companies are 59% more volatile than the market. Next, lets proceed to the consumer products companies - Hup Seng Industries Bhd and Oriental Holdings Berhad. Both companies has beta which greater than zero but less than 1. This indicates that returns of companies are generally in the same direction with market, but less than the movement of the benchmark. Consumer products companies mostly less volatile than the market. This is because demand for consumer product such as clothing, food, and automobiles are stable and less affected by the economic condition. Thus, even during economic downturn, consumer will still demand for these products as products such as food and clothing are basic need of human-being.

39

Lastly, trading or services sectors - Yinson Holdings Berhad and Borneo Oil Berhad. Yinson Holdings has beta which greater than zero but less than 1. Unlike Borneo Oil, Yinson is not too much affected by the market. Borneo Oil has highest beta, which is 1.97. In other words, Borneo Oil is double as responsive the market. From the Table 4.1, we are also found that all the variables move together in same direction. FTSE Bursa Malaysia KLCI comprises the 30 largest companies listed on the Malaysian Main Market by full market capitalization that meet the eligibility requirements of the FTSE Bursa Malaysia Index Ground Rules. Thus, the data in the table shows that the 10 assets in our portfolio have a positive relationship with the largest 30 companies which is represented by the price index. Among 10 companies we have been invested, Borneo Oil Berhad is the company which is able to react quickly with market and can earn more return when the return of market increases. However, it is also brings greater loss if the market become worst. Hup Seng Industries Bhd is more independent with the trend of market, it is only has covariance matrix of 0.0001400767. Normally companies in same sector will face same market risk and challenges. For Malaysian Pacific, return of the asset move positive with market which has covariance matrix is 0.0005532323. It is also generate high return whenever return of other assets is high. The highest covariance matrix of Malaysian Pacific is 0.0018557480. This is shows Malaysian Pacific is able to get higher return if return of Borneo Oil increases. For Unisem, it is also shows positive relationship with market return and other asset return. When the market return increases 1%, return of Unisem will increases by 0.07%. It is also has highest covariance matrix with Borneo Oil, 0.0021290632. Both of

40

business of Malaysian Pacific and Unisem shows weak relationship with Hup Seng Industries. For companies in plantation sector; Kuala Lumpur Kepong and Kulim, both companies have nearly covariance matrix with market, these are 0.0004556918 and 0.0005354185. For Kuala Lumpur Kepong has highest covariance matrix with Borneo Oil, that is 0.0009785125. Kulim has highest positive relationship with Muhibbah Engineering, which is 0.0010413557. Both of companies from sector plantation have lowest covariance matrix with Hup Seng Industries. Hup Seng Industries and Oriental Holdings are based on consumer products sector. Hup Seng Industries is produce daily foodstuff. This is the reason it is slightly affect by the unfavorable market situation. It is only has covariance matrix of 0.0001400767 with market. It is has lower covariance matrix with others companies, such as Muhibbah Engineering and Ekovest. For Oriental Holdings, it is has slightly positive relationship with market, covariance matrix of 0.0003113934. Muhibbah Engineering and Ekovest both have slight relationship with market, these are 0.0006985672 and 0.0005372219. This is due to it is based on construction sector, and this sector will always affected by governments policies. Both of it has highest covariance matrix with each other, that is 0.0015642546. This is due to it is from same sector. For trading and services sector, Yinson Holdings has slightly relationship with market, it is only has covariance matrix of 0.0002249608. It is also has slightly relationship with others company. Covariance matrix of Yinson Holdings with others

41

companies are not more than 0.0006. For Borneo Oil, it is more affected by sector of construction because it has some investment that related to construction sector. In conclusion, the 10 assets have positive relationship with each other and also market. Thus, if one asset drops or increases, other assets will also being affected with different degree of positive effect.

42

ASSET

BETA

VARIANCE

STANDARD DEVIATION

COVARIANCE (STOCK VS MARKET)

CORRELATION COEFFICIENT (STOCK VS MARKET)

FTSE BURSA MALAYSIA KLCI PRICE INDEX (~M$) MALAYSIA PACIFIC (~M$) UNISEM (M) KUALA LUMPUR KEPONG (~M$) KULIM (MALAYSIA) (~M$) HUP SENG INDUSTRIES (~M$) ORIENTAL HOLDINGS (~M$) MUHIBBAH ENGINEERING (M) (~M$) EKOVEST (~M$) YINSON HOLDINGS (~M$) BORNEO OIL (~M$) 1.225225464 0.513061189 1.973321375 0.003794890 0.002963677 0.011079736 0.061602676 0.054439668 0.105260324 0.000537222 0.000224961 0.000865238 0.416471484 0.197343366 0.392556304 1.593200896 0.004624776 0.068005706 0.000698567 0.490562136 1.261739886 1.594774102 1.039282392 0.007075848 0.003630250 0.001309912 0.084118057 0.060251560 0.036192704 0.000553232 0.000699257 0.000455692 0.31408662 0.55424236 0.60128639 1 0.000438468 0.020939622 0.000438468 1

1.221112592

0.002531034

0.050309380

0.000535419

0.508247885

0.319468546

0.000910642

0.030176847

0.000140077

0.221678249

0.710185352

0.000758096

0.027533534

0.000311393

0.54010548

Table 4.2: Summary of Beta, Variance, Standard Deviation, Covariance between Assets and Market, and Correlation Coefficient

43

For individual stock, Malaysian Pacific and Unisem have a good performance in these 10 years. The variance of Malaysian Pacific and Unisem are high; these are 0.071% and 0.36%. The standard deviation of Malaysian Pacific and Unisem are high: 8.41% and 6.02%. This is due to both of the company are based technology sector. Technology sector always faced volatile. New technology is develops rapid in recent years. It is a challenge for company and price of stock company will fluctuate. Income of company also always affected if company is unable to react quickly on the trend of market. Both of the companies enhance its management and able to compete with others. It is able to get high return to investor. We find that return of Malaysian Pacific and Unisem are 12.11% and 15.6%. In recent decade, plantation sector has faced challenges. The community price always fluctuated. Climate is also always changed. Kuala Lumpur Kepong and Kulim are companies based on plantation. We find that variance for Kuala Lumpur Kepong and Kulim are 0.13% and 0.25%, standard deviation for Kuala Lumpur Kepong and Kulim are 3.61% and 5%. Although the risk is high, return for both companies are negative; these are -19.4% and -20.4%. This phenomenon is unmatched with theory Risk Return Trade Off, high risk associated with potentially high return. This is normally due to geopolitical event happen such as economic factor. As mention before, company need face many challenges. This is the reason why the companies performance also volatiles. Companies which product consumer product normally face lower risk. Hup Seng Industries has 0.09% of variance and 3% of standard deviation. Oriental Holdings has 0.08% of variance and 2.75% of standard deviation. Both of the companies have lowest risk in this portfolio. This is due to people will buy the consumer products although the

44

economic recession happens. According to the theory Risk Return Trade Off, we are able to expect the returns of both companies are low. However, both of companies performances are unsatisfied, because it is generate negative return to us. Hup Seng Industries generated -2.7% of return. Oriental Holdings has -5.7% of return. Hup Seng Industries produces biscuit product. It faced challenges because people have many choices instead of biscuits. They are preferred bread or instant noodles, because it is more convenient. Therefore, sales of the Hup Seng Industries have affected. For Oriental Holdings, it is do diversified investment. It is expand the business segments to 7 parts; these are automotive, hotels and resorts, plastic products, plantation, investment holding and financial services, property development and healthcare. Because of expanded business, the performance of the company is unstable and the price of stock becomes volatile. For construction sector, it is develop in this decade. This is due to markets in this industry are increasing according to the development at Malaysia. Moreover, construction companies in Malaysia are also looking forward to the world market. We know that the risk of company in construction sector is high. This is due to the project of company normally is costing. For Ekovest, it is reacts quickly in trend of market. It is faced high risk with 0.37% of variance and 6.16% of standard deviation. But, it is generated 17% of return. We also can say the successful of Ekovest is not only depends of the trend of market, it is also due to the good internal control of company. This is on account of Ekovest do well than others construction companies, such as Muhibbah Engineering. Muhibbah Engineering is a high risk investment too (0.46% of variance and 6.8% of

45

standard deviation), but it is only generate -4.8% of return. This is due to the price of materials increases sharply and the competition becomes more intense. For trading or services sector, it is also high risk investment. For Yinson Holdings, it is has 0.3% of variance and 6.16% of standard deviation. Although risk is high, it is unable to generate satisfy return. It is generate -4% of return. This is due to this sector easy influenced by technologies and research and development efforts. Yinson Holdings is unable to face highly competitive in this sector. However, for Borneo Oil, it is shows it talent in companys management. It is able to integrate its core activities with advances in technology in order to remain relevant and competitive. It is also operates in four segments, such as restaurant, franchising and head office operations segment, general trading segment, management and operations of properties segment, and oil, gas and energy related business segment. It is achieve excellent result in these four segments and bring 10.5% of return.

46

ASSET MALAYSIA PACIFIC UNISEM (M) KUALA LUMPUR

WEIGHTAGE 0.10 0.10

VARIANCE 0.007075848 0.003630250

ANNUAL RETURN

RETURNPF 0.012105171 0.015585705

0.121051714 0.155857045

0.10 KEPONG KULIM (MALAYSIA) HUP SENG INDUSTRIES ORIENTAL HOLDINGS MUHIBBAH 0.10 ENGINEERING (M) EKOVEST YINSON HOLDINGS BORNEO OIL TOTAL RETURNPF VARIANCEPF STANDARD DEVIATIONPF 0.10 0.10 0.10 1.00 -0.0021073983 0.0010777925 0.0328297508 0.10 0.10 0.10

0.001309912

-0.194431646

-0.019443165

0.002531034 0.000910642 0.000758096

-0.204840239 -0.027067773 -0.057151612

-0.020484024 -0.002706777 -0.005715161

0.004624776

-0.048197099

-0.004819710

0.003794890 0.002963677 0.011079736

0.170579665 -0.042027860 0.105153822

0.017057966 -0.004202786 0.010515382

Table 4.3: Summary of Individual Stock and Portfolios Weightage, Variance, Return for 10 Assets (If every stocks is invested equally)

47

If we equally invested in the 10 assets, we can find that the return of the portfolio is -0.21% where 0.11% of portfolio variance and 3.28% of standard deviation. Through the diversification, we can balance out each asset and can get a well-rounded portfolio with ability of recovering from market setbacks and limit the losses. We can say the loss from Kuala Lumpur Kepong, Kulim, Hup Seng Industries, Oriental Holdings, Muhibbah Engineering and Yinson Holdings can be offset with the high return asset. It is also stabilize the risks of companies which are always faced volatile.

48

Investing with equal weightage of asset might not a best portfolio. Therefore, we look at the other alternatives; these are with short selling and without short selling.
SHORT SELLING ALLOWED VARIANCE 0.0004043 0.0004040 0.0004039 0.0004040 0.0004043 RETURN -0.0645983 -0.0655983 -0.0665983 -0.0675983 -0.0685983

Table 4.4: Summary of Data to graph Scatter Bar if Short Selling is Allowed

EFFICIENT FRONTIER WHERE SHORT SELLING IS ALLOWED

-0.0640000 0.0004039 0.0004040 0.0004040 0.0004041 0.0004041 0.0004042 0.0004042 0.0004043 0.0004043 0.0004044 -0.0645000 -0.0650000 -0.0655000 -0.0660000 RETURN -0.0665000 -0.0670000 -0.0675000 -0.0680000 -0.0685000 -0.0690000 VARIANCE (RISK ASSOCIATED)

Figure 4.1: Efficient Frontier where Short Selling is Allowed

49

In the case where short selling is allowed, we found that the portfolio variance has decreased compared to the equally invested portfolio. The portfolio variances become 0.04039%, 0.04040% and 0.04043%. Since the variance is decrease, this is means the risk an investor might take is also decrease. A smaller variance indicates the numbers in the set are close from the mean. The standard deviation is also decrease if compared to the portfolio which consists of 10 equally invested stocks. The standard deviation has decreased to 2.0% compared with 3.28% for the equally invested portfolio. We can conclude that the risk of investment portfolio where short selling is allowed is lower than the portfolio which gives 0.1 of weightage to each asset. Since the risk is lower, the return also decreases. The return for the investment portfolio where short selling is allowed is around -6.6%. Through the graph, we can found that a set represents the risk-return combinations attainable with all possible portfolios. The portfolio which has 0.04039% of variance, 2.009% of standard deviation and -6.66% of return is the optimal portfolio. It represents the highest level of satisfaction we can achieve given the available set of portfolio. The portfolio above the optimal portfolio is the efficient portfolio. However the portfolio below the optimal portfolio is below the optimal portfolio is unsatisfactory, it is due to higher risk we need accept, but lower potential return that we can get. We found that the return of portfolio becomes lower. This is due to we are selling assets that are borrowed in expectation of a fall in the assets price, such as Unisem and Muhibbah Engineering. After that, we will buy an equivalent number of assets at the new lower price and returns to the lender of the assets that were borrowed. However, this kind of the stock actually generated high return to us. This caused portfolio returns to decrease

50

because of we cannot take advantages of the potential of stock in future. Thus, in the optimal portfolio, Excel advised us to short sell some of the stocks, which are Unisem (M), Muhibbah Engineering, and Borneo Oil to minimize the loss.

51

SHORT SELLING N/A VARIANCE 0.0004164 0.0004159 0.0004146 0.0004150 0.0004149 RETURN -0.05773 -0.05873 -0.05973 -0.06073 -0.06173

Table 4.5: Summary of Data to graph Scatter Bar if Short Selling is not Allowed

EFFICIENT FRONTIER WHERE SHORT SELLING IS NOT ALLOWED

-0.05750 0.0004144 0.0004146 0.0004148 0.0004150 0.0004152 0.0004154 0.0004156 0.0004158 0.0004160 0.0004162 0.0004164 0.0004166 -0.05800 -0.05850 -0.05900 RETURN -0.05950 -0.06000 -0.06050 -0.06100 -0.06150 -0.06200

VARIANCE (RISK ASSOCIATED)

Figure 4.2: Efficient Frontier where Short Selling is Allowed

52

In the case where short selling is not allowed, the shape of efficient frontier for case where short selling is not allowed is not that smooth compared to the case where short selling is allowed. We found that the portfolio variance is lower than the equally weightage of portfolio, but it is higher than the portfolio with short selling. This indicates that investment portfolio where short selling is not allowed is more risky than the investment portfolio where short selling is allowed. The return of the portfolio without short selling is higher than the equally weightage of portfolio, but it is lower than the portfolio with short selling. This happens as we did not sell the stock even the price has raised to the peak where other investors are selling their stocks. The aggressive selling of stock will cause the stock price to drop and lastly leads to loss for us. The standard deviation also lower than the equally weightage of portfolio, but it is higher than the portfolio with short selling. This is due to it is hasnt an opportunity to selling assets which is expected fall in price.

53

INVESTMENT PORTFOLIO WHERE SHORT SELLING IS ALLOWED ASSET MALAYSIA PACIFIC UNISEM (M) KUALA LUMPUR KEPONG KULIM (MALAYSIA) HUP SENG INDUSTRIES ORIENTAL HOLDINGS MUHIBBAH ENGINEERING (M) EKOVEST YINSON HOLDINGS BORNEO OIL TOTAL RETURNPF VARIANCEPF STANDARD DEVIATIONPF OPTIMUM -0.002 0.002 -0.038 0.156 0.022 0.380 0.388 -0.030 0.044 0.086 -0.010 1.000 -0.0685982630 0.0004043157 0.0201076032 OPTIMUM -0.001 0.006 -0.037 0.155 0.021 0.379 0.387 -0.030 0.044 0.086 -0.010 1.000 -0.0675992630 0.0004040272 0.0201004266 MINIMUM 0.010 -0.037 0.154 0.020 0.379 0.387 -0.031 0.044 0.085 -0.010 1.000 -0.0665982630 0.0004039307 0.0200980265 OPTIMUM +0.001 0.014 -0.037 0.153 0.019 0.378 0.386 -0.032 0.044 0.085 -0.010 1.000 -0.0655982630 0.0004040268 0.0201004189 OPTIMUM +0.002 0.018 -0.037 0.152 0.018 0.378 0.386 -0.032 0.045 0.084 -0.010 1.000 -0.0645972630 0.0004043159 0.0201076070

Table 4.6: Investment Portfolio where Short Selling is Allowed

54

INVESTMENT PORTFOLIO WHERE SHORT SELLING IS NOT ALLOWED ASSET MALAYSIA PACIFIC UNISEM (M) KUALA LUMPUR KEPONG KULIM (MALAYSIA) HUP SENG INDUSTRIES ORIENTAL HOLDINGS MUHIBBAH ENGINEERING (M) EKOVEST YINSON HOLDINGS BORNEO OIL TOTAL RETURNPF VARIANCEPF STANDARD DEVIATIONPF OPTIMUM -0.002 0.00 0.00 0.14 0.01 0.37 0.37 0.00 0.02 0.08 0.00 1.00 -0.0617254551 0.0004148999 0.0203690930 OPTIMUM -0.001 0.000 0.000 0.140 0.014 0.366 0.375 0.001 0.024 0.079 0.000 1.000 -0.0607264551 0.0004150221 0.0203720922 MINIMUM 0.002 0.000 0.140 0.012 0.366 0.375 0.000 0.026 0.079 0.000 1.000 -0.0597254551 0.0004146381 0.0203626636 OPTIMUM +0.001 0.000 0.000 0.133 0.013 0.367 0.376 0.002 0.027 0.080 0.002 1.000 -0.0587263340 0.0004158953 0.0203935103 OPTIMUM +0.002 0.00 0.00 0.13 0.01 0.37 0.38 0.00 0.03 0.08 0.00 1.00 -0.0577244551 0.0004164181 0.0204063243

Table 4.7: Investment Portfolio where Short Selling is not Allowed Table 4.6 and Table 4.7 have shown the deviation of weightage for each stock when the portfolio return changed by 0.001 positively or negatively.

55

56
Table 4.8: Pearsons Correlation Table

We found that the correlation coefficient of FTSE Bursa Malaysia KLCI has fairly positive with many sectors, these are plantation and construction. Unisem from technology, Oriental Holdings from consumer product and Borneo Oil have fairly positive relationship with FTSE Bursa Malaysia KLCI. It is has returns that move together in the same direction and magnitude. Hup Seng Industries and Yinson Holdings have very weak and positive relationship with other companies. This is means it only increases or decreases a bit of return when return of other companies is increase. Malaysian Pacific has slightly positive relationship with some companies; these are Unisem, Kuala Lumpur Kepong, Kulim, Muhibbah Engeering, Ekovest and Borneo Oil. The return of Malaysian Pacific will increase mildly when the companies earn more return to us. Oriental Holdings and Muhibbah Engineering have the slightly positive with Unisem, Kuala Lumpur Kepong and Kulim. Its relationship is stronger than relationship between Malaysia Pacific and Unisem, Kuala Lumpur Kepong and Kulim. This is means it is more affected by the performances of Unisem, Kuala Lumpur Kepong and Kulim.

57

CHAPTER 5:

CONCLUSION

Throughout our analysis, we are facing loss from our investment. Although we have invested in 10 companies from five different sectors, we are unable to get a greater return from the portfolio. To prevent this situation becomes worst, we should diversify the investment portfolio again. We should not only invest in the asset which move positive with market. This is due to when bear market happens, we will loss. We should invest in the asset which is move opposite with market, such as defensive stock. This is due to they tend to be less susceptible to downswings in the business cycle. Furthermore, we also need to add blue chip stocks as our investment asset. Blue chips stocks are less risk than other assets and it is able to get high return. Blue chip stocks are not immune from bear market. With this, we are able to sustain in unfavorable market which occurs in this recent year. Moreover, we should not only focus in stock investment. We should diversify our portfolio with some fixed-income securities such as bonds. Bonds are long-term debt instruments where a bondholder has a contractual right to receive periodic interest payments plus return of the bonds face value at maturity. Bond is less risky compared to common stock as bond offer contractually guaranteed returns. Thus, by adding bonds into a portfolio may protect the value of the portfolio. Besides, invest in mutual funds may also hedge some market risk. A mutual fund is a portfolio of stocks, bonds, or other assets that were purchased with a pool of funds contributed by various investors and are managed by an investment company on behalf of

58

its clients. Mutual funds allow investors to construct a well-diversified portfolio without having to invest a large sum of money. To construct a well-diversified portfolio, we must establish a clear investment goal. Whether we want to accumulate retirement funds or we want to enhance our income. If we want to accumulate retirement funds, we should adopt a long term investment plan which can provide a stable return over a period of time. In contrast, if we want to enhance our income, we should go for short term investment which is more volatile. As the more volatile the investment, the risky the investment; the risky the investment, the higher the potential of return.

59

REFERENCES

Investopedia. (2013, 11 18). Retrieved from Modern Portfolio Theory - MPT: http://www.investopedia.com/terms/m/modernportfoliotheory.asp Wikipedia. (2013). Retrieved from Wikipedia: The Free Encyclopedia: http://en.wikipedia.org/wiki/Risk-return_spectrum

60

APPENDIX

61

PRINT SCREEN OF SOLVER FUNCTION CASE 1: SHORT SELLING IS ALLOWED

i. ii. iii.

iv.

OPTIMAL +0.001 Set Objective - Set Return of Portfolio as the target cell to the Value of Optimal +0.001 which is -.0655982629658807. By Changing Variable Cells - Variable Cells will be WD_PF (the weightage of each stock). Subject to the Constraints - Set the Total Weightage always equal to 1. (Note: For short selling is allowed, uncheck the column for Make Unconstrained Variables Non-Negative) Solve and copy the value to the Short Selling Allowed table (as shown in Table 1.4) and also the Investment Portfolio Table (as shown in Table 3.5).

62

OPTIMAL +0.002 i. ii. iii. Set Objective - Set Return of Portfolio as the target cell to the Value of Optimal +0.002 which is -0.0645982629658807. By Changing Variable Cells - Variable Cells will be WD_PF (the weightage of each stock). Subject to the Constraints - Set the Total Weightage always equal to 1. (Note: For short selling is allowed, uncheck the column for Make Unconstrained Variables Non-Negative) Solve and copy the value to the Short Selling Allowed table (as shown in Table 1.4) and also the Investment Portfolio Table (as shown in Table 3.5).

iv.

63

OPTIMAL -0.001 i. ii. iii. Set Objective - Set Return of Portfolio as the target cell to the Value of Optimal 0.001 which is -0.0675982629658807. By Changing Variable Cells - Variable Cells will be WD_PF (the weightage of each stock). Subject to the Constraints - Set the Total Weightage always equal to 1. (Note: For short selling is allowed, uncheck the column for Make Unconstrained Variables NonNegative) Solve and copy the value to the Short Selling Allowed table (as shown in Table 1.4) and also the Investment Portfolio Table (as shown in Table 3.5).

iv.

64

OPTIMAL -0.002 i. ii. iii. Set Objective - Set Return of Portfolio as the target cell to the Value of Optimal +-0.002 which is -.0.0685982629658807. By Changing Variable Cells - Variable Cells will be WD_PF (the weightage of each stock). Subject to the Constraints - Set the Total Weightage always equal to 1. (Note: For short selling is allowed, uncheck the column for Make Unconstrained Variables Non-Negative) Solve and copy the value to the Short Selling Allowed table (as shown in Table 1.4) and also the Investment Portfolio Table (as shown in Table 3.5).

iv.

65

CASE 2:

SHORT SELLING IS NOT ALLOWED

OPTIMAL +0.001 i. ii. iii. Set Objective - Set Return of Portfolio as the target cell to the Value of Optimal +-0.001 which is -0.0587254550793991. By Changing Variable Cells - Variable Cells will be WD_PF (the weightage of each stock). Subject to the Constraints - Set the Total Weightage always equal to 1. (Note: For short selling is not allowed, check the column for Make Unconstrained Variables Non-Negative) Solve and copy the value to the Short Selling Allowed table (as shown in Table 1.4) and also the Investment Portfolio Table (as shown in Table 3.5).

iv.

66

OPTIMAL +0.002 i. Set Objective - Set Return of Portfolio as the target cell to the Value of Optimal +-0.002 which is -0.0577254550793991. ii. By Changing Variable Cells - Variable Cells will be WD_PF (the weightage of each stock). iii. Subject to the Constraints - Set the Total Weightage always equal to 1. (Note: For short selling is not allowed, check the column for Make Unconstrained Variables Non-Negative) iv. Solve and copy the value to the Short Selling Allowed table (as shown in Table 1.4) and also the Investment Portfolio Table (as shown in Table 3.5).

67

OPTIMAL -0.001 i. ii. iii. Set Objective - Set Return of Portfolio as the target cell to the Value of Optimal 0.001 which is -0.0607254550793991. By Changing Variable Cells - Variable Cells will be WD_PF (the weightage of each stock). Subject to the Constraints - Set the Total Weightage always equal to 1. (Note: For short selling is not allowed, check the column for Make Unconstrained Variables Non-Negative) Solve and copy the value to the Short Selling Allowed table (as shown in Table 1.4) and also the Investment Portfolio Table (as shown in Table 3.5).

iv.

68

OPTIMAL -0.002 i. ii. iii. Set Objective - Set Return of Portfolio as the target cell to the Value of Optimal 0.002 which is -0.0617254550793991. By Changing Variable Cells - Variable Cells will be WD_PF (the weightage of each stock). Subject to the Constraints - Set the Total Weightage always equal to 1. (Note: For short selling is not allowed, check the column for Make Unconstrained Variables Non-Negative) Solve and copy the value to the Short Selling Allowed table (as shown in Table 1.4) and also the Investment Portfolio Table (as shown in Table 3.5).

iv.

69