MM 6055 CAPITAL MARKET ANALYSIS

Portfolio Management For Final Exam

Ferdinand Throedu

(29111343)

MASTER OF BUSINESS ADMINISTRATION SCHOOL OF BUSINESS AND MANAGEMENT INSTITUT TEKNOLOGI BANDUNG 2012

Executive Summary The Objective of this paper is to make optimum risky mutual funds equity portfolio. The writer act as a treasury manager and have to sell and convince investors to buy his portfolio. The portfolio per unit is set IDR 100.000.000 which should be consisted of 5 stocks as given.And as a treasury manager, writer should found and calculate the optimum weight for each stock in this portfolio that would satisfy investors demand and attract more customers to buy this portfolio.

Before making the calculations, assumed that investors are mostly risk averse, means that he/she will buy portfolio with the same return but lower risk. So the writer should recommend the best combinations or proportions of each stock in this portfolio that will make optimum risky portfolio (maksimum sharpe ratio) based on historical data on each stock within 5 years (2007-2012). In forming optimum risky portfolio, there are some steps are needed to follow : - Collect Historical Data from Yahoo finance and Measure Average of SBI rate - Measure Holding Period Return, Expected Return (AAR), Geometric Return and Standard Deviation of each stock and also IHSG - Build Covariance Matrix and Correlation Matrix then Calculate Beta of Each stock - Measure past performance of each stock - Determine contraints - Forming Optimum Risky Portfolio using Add Solver After calculations, writer recommend the optimum risk portfolio : PGAS (52,69%), ITMG(21,34%), ASRI (18,66%), TLKM (7,31%), and BUMI (0%). This results considered as efficient (diversified) portfolio that can be offered to risk averse investors (quite high return 28,02% with lower volatility compare to each individual stock in this portfolio). Considered on Master Plan Acceleration and expansion of Indonesia Economic Development 2011-2025 (MP3EI), Gas, coal Mining and ICT are included in 22 main economic activities that will be expanded rapidly in several next years.

I.

OBJECTIVE The Objective of this paper is to make optimum risky mutual funds equity portfolio. The writer act as a treasury manager and have to sell and convince investors to buy his portfolio. The portfolio per unit is set IDR 100.000.000 which should be consisted of 5 stocks as given.And as a treasury manager, writer should found and calculate the optimum weight for each stock in this portfolio that would satisfy investors demand and attract more customers to buy this portfolio. Before making the calculations, assumed that investors are mostly risk averse, means that he/she will buy portfolio with the same return but lower risk. So the writer should recommend the best combinations or proportions of each stock in this portfolio that will make optimum risky portfolio (maksimum sharpe ratio) based on historical data on each stock within 5 years (2007-2012). There are 2 questions that writer should answer : 1. How much do you have to invest for each stock in which the total investment of 5 stocks will not exceed the budget of portfolio setting per unit? How much is the return of your portfolio and the net assets value (NAV)? 2. How is the risk of your portfolio that you will be proposed ?

II.

ANALYSIS A. Theory of Efficient Diversification and Performance of Stocks As we know that diversifying our portfolio means we try to reduce or eliminate nonsystematic risk or diversiable risk. By doing diversification into many more stocks, portfolio volatility should continue to fall. There are two kind of investors : risk seeker and risk averse. Risk seeker investors usually prefer to get higher risk to achieve higher return while risk averse investors usually prefer to minimize risk to achieve some level target of return. Thats why to attract more investors who has characteristic as risk averse, we should provide the optimum risky portfolio. The optimum risky portfolio means that portfolio have a maksimum reward to volatility (risk) ratio. In order to form optimum risky portfolio based on hisorical data on each stock, there are some steps that needed to follow : 1. Measure annual expected return and standard deviation of each stock . There are several techniques to measure return of stock : Holding Period Returns : rate of return over a given investment period

Arithmetic Average : sum of returns in each period divided by number of periods

HPR avg =
-

HPR T n T =1

Geometric Average : single per period return that give the same cumulative performance as the sequence of actual returns

HPR avg
-

n = (1 + HPR T ) T =1

1/ n

Dollar weighted of Returns : internal rate of return (IRR) of cash flows

2. Build Covariance and Correlation Matrix of each stock in portfolio and also market We need these matrix to calculate Beta of each stock (to calculate Beta portfolio also) and also standard deviation of portfolio. Covariance Matrix :

Correlation Matrix :

3. Measure Past Performances of each stock in portfolio In order to measure past performance of each stock in a portfolio, we can use 3 type of measurements : Sharpe Measure : ratio of stock excess return to standard deviation. This ratio measures the reward to volatility trade off.

Treynor Measure : ratio of stock excess return to beta. This ratio gives average excess return per unit risk (systematic risk) incurred

Jensen Measure : the alpha of an investment. If alpha is positive means that this stock is undervalued while alpha is negative means that this stock is overvalued

Before we calculate 3 ratios above, we need to define expected return of risk free asset (average of SBI rate) and calculate Expected return of market and also Beta of each stock.

4. Measure Expected Return of Portfolio, Standard Deviation of Portfolio, Beta of Portfolio and Reward to Volatility Ratio of Portfolio Expected Return of Portfolio :

Standard Deviation of Portfolio :

2 (k p ) =
Beta of Portfolio :

w
i =1

2 (k i ) +
i =1

w
j =1

w jCov(k i , k j )

p = Wi i
i =1

Reward to Volatility Ratio of Portfolio

B. Forming Optimum Risky Portfolio As Given, five stocks that should be include at portfolio are ITMG, TLKM, ASRI, BUMI and PGAS. These are some datas about these five stocks from reuters (accessed at 9 Nov 2012) :
ITMG Indoraya Tambang Megah Coal Mining Rp41.600 TLKM PT Telkom Indonesia Telecommunication Infrastructure Rp9.400 ASRI Alam Sutra Realty Property Rp570 BUMI Bumi Resources Coal Mining Rp640 PGAS Perusahaan Gas Negara Gas Mining Rp4.575

Company Name Main Business Current Price

Beta Market Cap (Mil.): Shares Outstanding (Mil.):

1,62 Rp46.496.408

0,6 Rp188.496.000

1,49 Rp11.003.670

1,86 Rp13.502.710

0,88 Rp113.935.104

1.129,93

20.160,00

19.649,41

20.773,40

24.241,51

a. Collect Historical Data from Yahoo finance and Measure Average of SBI rate First step to form an optimal portfolio is to collect monthly historical data on each stock and also IHSG (JKSE) from Yahoo Finance between Dec 2007 until October 2012 (because ITMG listed from Dec 2007). Writer choose Monthly Data because dates between each stock data is match (better than weekly data). IHSG historical data also downloaded because it reflects market movements. Average (annual) of SBI rate between 2007-2012 is used to determine expected return of risk free asset. From calculation we got average SBI rate as much as 7,03% b. Measure Holding Period Return, Expected Return (AAR), Geometric Return and Standard Deviation of each stock and also IHSG
Annualized Expected Return (arithmatic) Geometric Return Standard Deviation ITMG 44,28% 25,08% 63,25% TLKM 7,33% 3,26% 29,03% ASRI 38,48% 25,84% 56,99% BUMI -11,21% -35,18% 79,99% PGAS 20,59% 13,75% 38,52% IHSG 13,36% 9,99% 26,91%

Based on data above, it can be seen that within 5 years, rank of stock based on expected return (from highest to smallest) : ITMG, ASRI, PGAS, TLKM, BUMI. And rank of stock based on volatility (from highest to smallest) : BUMI, ITMG, ASRI, PGAS, TLKM. c. Build Covariance Matrix and Correlation Matrix then Calculate Beta of Each stock We can build Covariance Matrix and Correlation Matrix between each stock (and also IHSG) using Data Analysis add-ins at Excel Covariance Matrix ITMG ITMG 0,03276 TLKM 0,00385 ASRI 0,01571 BUMI 0,02154 PGAS 0,01070 IHSG 0,00955

TLKM 0,00690 0,00152 0,00252 0,00294 0,00366

ASRI

BUMI

PGAS

IHSG

0,02660 0,02005 0,00807 0,00883

0,05240 0,00406 0,01111

0,01215 0,00526

0,00593

Correlation Matrix

ITMG TLKM ASRI BUMI PGAS IHSG

ITMG 1,00000 0,25617 0,53230 0,51988 0,53622 0,68560

TLKM 1,00000 0,11230 0,13271 0,32143 0,57234

ASRI

BUMI

PGAS

IHSG

1,00000 0,53694 0,44865 0,70343

1,00000 0,16107 0,63051

1,00000 0,61988

1,00000

Using equation :
Stock ITMG

, Beta of each stock could be calculated :

Beta 1,611607 0,617421 1,489921 1,874488 0,887426

TLKM ASRI BUMI PGAS

These beta results already looks suitable from beta provided by reuters. d. Measure past performance of each stock After we calculate beta of each stock, market return, average SBI rate, return and volatility of each stock, now we can Measure past performance of each stock : Sharpe Measure, Treynor Measure and Jensen Measure.
Stocks ITMG TLKM ASRI BUMI PGAS IHSG Sharpe 0,589 0,010 0,552 -0,228 0,352 0,235 Treynor 0,063 0,005 0,211 -0,097 0,153 0,063 Jensen 0,270 -0,036 0,220 -0,301 0,079 0,000

From Calculation Results above, it can be seen that only 3 stocks that had better past performance than IHSG : ITMG, ASRI and PGAS. While PGAS and BUMI past performances are worse than IHSG. It is noticed also that PGAS and BUMI are overvalued. e. Determine contraints Before we use add solver to construct optimum risky portfolio, we should determine the constraints. There are 4 constraints that writer used : Total of investments should be 100 Million Rupiah

For Stock which have return more than 20% annualy (ITMG,ASRI,PGAS), total investments for that three stocks should at least 75 Million Rupiah

For Stock which have high risk (volatility more than 51% and Beta above 1,45 : ITMG, ASRI,BUMI), total investments for that three stocks should at most 40 Million Rupiah.

For stock which have negative alpha/overvalued (TLKM,BUMI), total investments for that two stocks should at most 10 Million Rupiah

f.

Forming Optimum Risky Portfolio using Add Solver And last step we will use add solver to find best proportions of each stock on portfolio to achieve optimum risky portfolio (maksimum sharpe ratio) and also fulfill constraints. And after running the add solver, we got the optimum risky portfolio as described below :
Stock ITMG TLKM ASRI BUMI PGAS Total Required Amount Invested Rp21.342.594 Rp7.312.663 Rp18.657.406 Rp0 Rp52.687.337 Rp100.000.000 Rp100.000.000 Weight 21,34% 7,31% 18,66% 0,00% 52,69% Expected Return 44,28% 7,33% 38,48% -11,21% 20,59% Standard Deviation 63,25% 29,03% 56,99% 79,99% 38,52%

Total Return (rupiah) Portfolio Expected Return (%) Variance Stdev Portfolio Average risk free return Reward to Risk Volatility Ratio Beta VAR

Rp28.015.847 28,02% 13,99% 37,41% 7,03% 0,5610 1,1347 -59,01% -Rp59.005.711

For BUMI dont get any weight because of contraints that already decided and because of bad pas performance in the past (negative Sharpe, Treynor and Jensen Ratio; also below market) and has a very high volatility (79,99%) Based on Analysis above, now we can answer question no 1 and 2 : 1. In order to achieve Optimum Risky (Max Reward to Volatility Ratio) Portfolio, i have to invest :
Stock ITMG Amount Invested Rp21.342.594 Weight in Portfolio 21,34%

TLKM ASRI BUMI PGAS

Rp7.312.663 Rp18.657.406 Rp0 Rp52.687.337

7,31% 18,66% 0,00% 52,69%

The return of writer portfolio is 28,02% per annum or Rp28.015.847 for first year. This rate of return already bigger than return of BUMI, TLKM and PGAS but below return of ITMG and ASRI. Calculation for Net Asset Value :

Stock ITMG TLKM ASRI BUMI PGAS Total

Amount Invested Rp21.342.594 Rp7.312.663 Rp18.657.406 Rp0 Rp52.687.337 Rp100.000.000

Weight in Portfolio 21,34% 7,31% 18,66% 0,00% 52,69%

Current Price 41.600 9.400 570 640 4.575 Total

Shares Outstanding 513 778 32732 0 11516 45540

assumed no fee charged Return 28,02% Initial NAV 1st Year NAV 2nd Year NAV 3rd Year NAV 4thYear NAV 5th Year NAV Years 1 2 3 4 5 Rp2.196 Rp2.811 Rp3.599 Rp4.607 Rp5.897 Rp7.550

assumed there is 5% back end load (until 5 year);reduces 1 %next year Return Back end load 28,02% 5,00% Initial NAV 1st Year NAV 2nd Year NAV 3rd Year NAV 4thYear NAV 5th Year NAV Years 1 2 3 4 5 Rp2.196 Rp2.699 Rp3.351 Rp4.204 Rp5.328 Rp6.821

2. About Risk of portfolio that writer proposed : Standard Deviation of Portfolio is 37,41% , smaller than ITMG, ASRI, BUMI, PGAS . Beta of Portfolio is 1,13 , closer to 1 than ITMG, TLKM, ASRI, BUMI.

Based on data above it can be seen that by diversification, volatility of portfolio become smaller than volatility of individual stock. And because most of investors are risk averse, the optimum risky (max reward to volatility ratio) portfolio (include some constraints) is the best portfolio that can be offered to them. Maksimum risk aversion that an investor should choose to invest in this portfolio is :

A=

E ( rp ) rf = 2 ,9995 0 .5 2p

C. Macroeconomy analysis and prospectus Within Current GDP growth of 6,4% , interest rate of 5,75% (SBI rate), and inflation rate of 4,5% in second quarter 2012, Indonesia economy has sustainable growth of 6,5% .This growth will cause demand for energy (oil, gas and coal) increase. Demand for energy not only come frome domestic market but also from foreign market such as China. Thats why energy industry such as Gas and Coal Mining should have good prospect for few next years. The property industri also will be stronger because of low mortgage rate (KPR), increment of GDP per capita and increment of house and property needs. For Telecommunication Industry, growth become slower in last 3 years but sentiment and prospect in the future still positive because telecommunication technology in Indonesia not mature enough. IHSG index also increase by 10,37% from 3141,69 in January 2012 to 4350,29 in October 2012 and have target price of 4400 at the end of 2012. Considered on Master Plan Acceleration and expansion of Indonesia Economic Development 2011-2025 (MP3EI), Gas, coal Mining and ICT are included in 22 main economic activities that will be expanded rapidly in several next years.

Name of Portfolio : Secure Fund Portfolio Total investments per unit : Rp 100 Million Shares outstanding in each unit : 45.540 shares NAV per unit : Rp 2.196

Secure Fund PortfolioIndoraya

Perusahaan Gas Negara, 52.69% Tambang Megah, 21.34% PT Telekomunika si Indonesia, 7.31%

Bumi Resources, 0.00%

Alam Sutra Realty, 18.66%

Return & NAV per unit Period 1 months 3 months 6 months 1 years 3 years 5 years Return 0,26% 3,14% 13,14% 28,02% 109,79% 243,81% NAV per unit Rp2.202 Rp2.265 Rp2.485 Rp2.811 Rp4.607 Rp7.550

Another statistic measurements :

Stdev Portfolio Reward to Risk Volatility Ratio (Sharpe Ratio) Beta VAR (max loss per annum) or 37,41% 0,5610 1,1347 -59,01% -Rp59.005.711

Return ITMG TLKM ASRI BUMI PGAS Secure Fund Portfolio 44,28% 7,33% 38,48% -11,21% 20,59% 28,02%

Volatility 63,25% 29,03% 56,99% 79,99% 38,52% 37,41%

III. 3.1

CONCLUSION and RECOMMENDATION Conclusion 1. The optimum risky portfolio means that portfolio that have maksimum reward to volatility ratio (sharpe ratio). This kind of portfolio is considered as efficient (diversified) portfolio because it has lower volatility to achieve good return. And because most of investors are risk averse, this efficient portfolio should be the best portfolio that can be offered to them. 2. In forming optimum risky portfolio, there are some steps are needed to follow : - Collect Historical Data from Yahoo finance and Measure Average of SBI rate - Measure Holding Period Return, Expected Return (AAR), Geometric Return and Standard Deviation of each stock and also IHSG - Build Covariance Matrix and Correlation Matrix then Calculate Beta of Each stock - Measure past performance of each stock - Determine contraints - Forming Optimum Risky Portfolio using Add Solver

3.

To Support the analysis in forming optimum risky portfolio, we should consider macroeconomic analysis and prospect of this portfolio (return, NAV, volatility and maximum loss)

3.2

Recommendation Optimum Risky Portfolio that i recommend to invest :

Stock ITMG TLKM ASRI BUMI PGAS

Amount Invested Rp21.342.594 Rp7.312.663 Rp18.657.406 Rp0 Rp52.687.337

Weight in Portfolio 21,34% 7,31% 18,66% 0,00% 52,69%

Expected Return 44,28% 7,33% 38,48% -11,21% 20,59%

Standard Deviation 63,25% 29,03% 56,99% 79,99% 38,52%

And statistic analysis of this kind of portfolio :

Portfolio Expected Return (%) Variance Stdev Portfolio Average risk free return Reward to Risk Volatility Ratio Beta VAR per annum or 28,02% 13,99% 37,41% 7,03% 0,5610 1,1347 -59,01% -Rp59.005.711

I choose PGAS as the biggest investment proportion(52,69%) in this portfolio because of it has return (>20%) but has lower volatility (38,52%) compare to ITMG (63,25%) and ASRI (56,99%). The second biggest proportion (21,34%) goes to ITMG because it has biggest annual return but also bear highest risk too. For BUMI dont get any weight because of contraints that already decided and because of bad pas performance in the past (negative Sharpe, Treynor and Jensen Ratio; also below market) and has a very high volatility (79,99%) Considered on Master Plan Acceleration and expansion of Indonesia Economic Development 2011-2025 (MP3EI), Oil and Gas, coal Mining and ICT are included in 22 main economic activities that will be expanded rapidly in several next years.

APPENDIX I Charts of 5 years Movement Price of Each Stocks versus IHSG ITMG versus IHSG

TLKM versus IHSG

ASRI versus IHSG

BUMI versus IHSG

PGAS versus IHSG