UKFF3283 Portfolio Management Oct 2019/2020

UNIVERSITI TUNKU ABDUL RAHMAN

LKC FACULTY OF ENGINEERING AND SCIENCE

ACADEMIC YEAR 2019/2020

BACHELOR OF SCIENCE (HONS) ACTUARIAL SCIENCE

BACHELOR OF SCIENCE (HONS) FINANCIAL MATHEMATICS

YEAR 3 TRIMESTER 1

UKFF3283 PORTFOLIO MANAGEMENT

GROUP ASSIGNMENT
_____________________________________________________________

Confirm your assignment groups (of four/five maximum). Select two listed
companies (with “Berhad” or BHD) from the following list (First come first serve
basis based on the time stamp recorded in Google form, and MUST HAVE the
availability of the LATEST SEVEN years of financial data/annual reports).
Please register/confirm via Google form (https://forms.gle/gbvZGNFsK8s6Z83h6)
on the companies chosen and your group members.

Table: Key Industry Players in Glove

Top Glove Corporation Bhd
Hartalega Holdings Bhd
Kossan Rubber Industries Bhd
Supermax Corporation Bhd
Careplus Group Bhd
Comfort Gloves Bhd
Rubberex Corporation (M) Bhd

Source: Bursa Malaysia, Bloomberg. Researched by Ng Wai Mun and Lim Cian Yai.
This table is originally adopted from the article – Diversifying for growth, in Focus Malaysia, August
19-25, 2017, by Ng Wai Mun and Lim Cian Yai.
APA Reference: Ng, W.M. & Lim, C.Y. (2017, August 19 – 25). Diversifying for growth. Focus
Malaysia, 8-10.

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UKFF3283 Portfolio Management Oct 2019/2020

UNIVERSITI TUNKU ABDUL RAHMAN

LKC FACULTY OF ENGINEERING AND SCIENCE

REQUIRED:

(a) All selections MUST be done/sent via Google form

(https://forms.gle/gbvZGNFsK8s6Z83h6) the latest by week 2, ending 25th
October, 2019 (Friday). Tutor’s approval (via email) must be obtained on
the selected company and the number of students registered in each
assignment group.

By utilizing the WEEKLY data, you are required to:

(1) Calculate the mean (average) share price returns of your selected
companies for each year and over the LATEST six years period;
(2) Calculate the risks, as measured by both standard deviation and beta
of your selected companies over the LATEST six years period;
(3) Determine the covariance and correlation coefficient for the returns of
these companies' shares;
(4) Calculate and plot the risk and return of a portfolio made up of
proportions of the three or five shares.
(5) Identify the point of optimal portfolio. Appraise on your findings.
[40 marks]

(b) Using the share price returns calculated for your allocated company in part (a)
in conjunction with the targeted return predicted by the CAPM, determine the
abnormal returns earned over the 6 years period of the shares/counters.
Investigate on your results or findings. You may justify your findings based on
technical analysis perspective, in line with the facts and figures from various
researches, articles and resources pertaining to your selected shares.
[25 marks]

(c) From your analysis in (a) and (b), justify whether diversification is significant
for your selected companies to expand and to cast businesses’ uncertainty.
Analyse and criticized the difficulties that may arise from the adoption of
Portfolio Theory in portfolio investment relative to your actual findings. From
the fundamental analysis perspective, evaluate the implications of your
selected firms with regard to the uncertainties and challenges faced in overall
businesses’ operations and investment environment. Provide an overall
summary, in line with ALL findings obtained from the portfolio risks and
returns analysis in part (a), abnormal return analysis in part (b), and the
business or industry nature and settings. Supporting your overall summary
and findings, where appropriate, with the various articles and resources
pertaining to your selected shares/counters. [35 marks]

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UKFF3283 Portfolio Management Oct 2019/2020

UNIVERSITI TUNKU ABDUL RAHMAN

LKC FACULTY OF ENGINEERING AND SCIENCE

The assignment must not more than 4,000 words in length. ALL paragraphs must
be clearly and appropriately referenced using 6th edition of APA academic
referencing style. Assignment groups from the ALL tutorial groups are NOT
allowed to choose the same companies. NO changes are allowed after the
submission, any changes made on the confirmed selected companies will be
penalized.

Assignment hand-in date: WEEK 4

Standard format: Arial, font size of 12, 1.5 spacing, one-inch margins, double-
sided. Hand-written assignment will not be accepted.

Students MUST submit both hardcopy and softcopy of the assignment ON THE
SUBMISSION DATE (please read Late Submission Penalty Clause in the Course
Plan).

For hardcopy, print out all your findings from part (a) to part (c), relevant
appendices, necessary calculations and workings in MS word and MS excel for
plotting the portfolio-three/five shares’ efficiency frontier (AVOID to print out all the
weekly data such as weekly share prices, market return, market index and risk-free
(T-bill) rates over the six years period). All relevant information, data, facts and
figures used in your assignment must be included in the appendices. Students are
advised to include the following as Appendix attached with their assignment:
(1) ONLY the yearly AVERAGE share prices, dividend-per-share (DPS), market
indices, market return, risk-free rate and key financial highlights for the
selected companies;
(2) List of references (APA format);
(3) Other data, charts, tables or other relevant information to support your
analysis (if any).

Students are reminded to include mark sheet provided below as the cover page of
the hardcopy for submission. DO NOT use comb binding or adding transparency
cover for submitted assignment. Just staple and punch two holes. ALL the
diagrams, charts and graphs MUST be coloured print, for clear illustration purpose.

For softcopy, save the files/works in nice folders and burn into a CD. The CD
should include the FOLDERS based on followings titles and arrangements:
(a) Annual Reports (Financial statements for the latest SIX years);
(b) Excel calculations/findings (for workings/calculations in part (a) to part (b));
(c) Financial data (weekly share prices, dividends (Dividend per share and dividend
yields), market index (FBM KLCI index). The financial data on share prices,
dividends and market index (FBM KLCI index) market return (in percent), risk-free
(T-bills) rate and other relevant data MUST be saved in the excel format);
(d) Write up and findings from Part (a) to Part (c)

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UKFF3283 Portfolio Management Oct 2019/2020

UNIVERSITI TUNKU ABDUL RAHMAN

LKC FACULTY OF ENGINEERING AND SCIENCE

(e) References (ALL articles, website information, reports related to your selected
company).

Written feedback will be provided on a group basis to all students by Week 7.

Students are required to use the Library Resources, namely the Bloomberg, to
download all the relevant data for the selected companies, for instance the weekly
stock prices over the six years. Students are not allowed to obtain the relevant data
from free online resources, for instance the Bursa Malaysia and Yahoo Finance
(for other online resources, please refer to the INDEPENDENT LEARNING in
Course Plan).

Please read and refer to the user guides for plotting the portfolio (two shares)
efficiency frontier using MS Excel which will be shared by tutor.

Referencing
Accurate and consistent referencing is essential in all academic work. Whenever you
refer to either the work or ideas of someone, or are influenced by another's work, you
must acknowledge this. Similarly if you make a direct quotation from someone's work
this should be referred to accurately (please read ACADEMIC REGULATIONS –
Mode of Referencing in the Course Plan).

For most academic work, the 6th edition of APA referencing style is required.
Please download the publication manual of the APA 6th edition from
https://www.apastyle.org/manual. You must acknowledge all borrowed work in the
text. If you have used an idea or information, but put it into your own words, you
simply give the author’s surname and date (e.g., McLaren, 2005). If you have quoted
word for word, you must also give the page number (e.g., McLaren, 2005, p.59). At
the end of the piece of writing, you need give a list of references in alphabetical order
by author, with consistent punctuation using the examples below.

Academic Integrity
If your work is not properly referenced it may appear that you are trying to present
someone else's ideas as your own. This is plagiarism and it is considered to be a
form of cheating. It is your responsibility to ensure that your work conforms to the
University's standards of academic integrity.

Any assignment groups that are caught plagiarising or letting part or whole of their
work to be plagiarised will be penalised, with all the groups involved be awarded
ZERO (0) mark for the assignment (please read ACADEMIC REGULATIONS –
Plagiarism in the Course Plan). If you are unsure about any issue relating to
academic integrity, please discuss the issue with your lecturer or course tutor.

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UKFF3283 Portfolio Management Oct 2019/2020

UNIVERSITI TUNKU ABDUL RAHMAN

LKC FACULTY OF ENGINEERING AND SCIENCE

SELECTED MALAYSIAN LISTED COMPANIES:

___________________________________________________________________
___________________________________________________________________
TUTORIAL GROUP: ___
NAMES STUDENT ID
1)
2)
3)
4)
5)

Areas of evaluation Marks Marks

Allocated Awarded
Section (a) Efficient frontier and optimal 40 marks
portfolio
(1) Calculating the average share price return for
each year: [12 marks]
 collection of suitable share prices for each year

(2) Calculating the standard deviation [6 marks]

(3) Calculating the correlation coefficient

[4 marks]

(4) Plotting the portfolio (two shares) efficiency

frontier. [12 marks]

(5) Identify the point of optimal portfolio. Appraise

the shape of the frontier. [6 marks]

Section (b) Abnormal returns, technical 25 marks

analysis
 Selection of appropriate risk-free rates over the
latest 6 years [3 marks]
 Selection of appropriate equity risk premia
over the latest 6 years [3 marks]
 Selection of appropriate equity betas over the
LATEST 6 years [6 marks]
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UKFF3283 Portfolio Management Oct 2019/2020

UNIVERSITI TUNKU ABDUL RAHMAN

LKC FACULTY OF ENGINEERING AND SCIENCE

 Calculation of six required returns [3 marks]

 Calculation of an abnormal return for overall 6
years period [3 marks]
 Investigate on the findings. Justify findings
based on technical analysis perspective in line
with the researches from various articles and
resources [7 marks]

Section (c) Critiques, fundamental analysis 35 marks

 Justify whether diversification is significant for
your selected companies to expand and to cast
businesses’ uncertainty. [10 marks]
 Critique the suitability and sustainability of the
Portfolio Theory. [10 marks]
 Using Fundamental Analysis perspective,
analyze the implications of selected firms with
regard to the uncertainties and challenges on
overall businesses’ operations and investment
environment. [15 marks]
TOTAL 100 marks
Total convert to 20 marks

Comments:
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
EXAMINER’S NAME: ______________________________________________
SIGNATURE: __________________
DATE: __________

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UKFF3283 Portfolio Management Oct 2019/2020

UNIVERSITI TUNKU ABDUL RAHMAN

LKC FACULTY OF ENGINEERING AND SCIENCE

Learning Outcomes achieved:

CLO1 Assess the risk and return by incorporating an asset allocation scheme, fundamentals
(economic, industry and company factors) and technical indicators in line with the
various trading mechanisms and long-term goal of diversifying the overall risk in a
portfolio.

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UKFF3283 Portfolio Management Oct 2019/2020

UNIVERSITI TUNKU ABDUL RAHMAN

LKC FACULTY OF ENGINEERING AND SCIENCE

GUIDANCE NOTES

Part (a) (1) and (2)

 You decide whether it is best to use spot share prices or an average share price
around the spot date, to deal with share price volatility. Use a consistent approach to
calculating the entire share prices used in your assignment.
 Dividends for a given year (ending at your company's balance sheet date) must be
the sum of the interim dividend for that year and the final dividend for that year. The
interim dividend is paid during the year, while the final dividend is proposed during
the year and paid after the year end. Dividend information may obtain as well from
dividend per share and dividend yields.
 You are to use the Library Resources ONLY, namely the Bloomberg, to download
all the relevant data for your selected companies, for instance the stock prices and
dividend yields for the LATEST six years. You are not allowed to obtain the relevant
data from free online resources, for instance the Bursa Malaysia, other stock
exchange markets and Yahoo Finance (for other online resources, please refer to
the INDEPENDENT LEARNING in Course Plan). Please read and refer to the user
guides for plotting the portfolio (two/three/five-share) efficiency frontier using
MS Excel which will be shared by tutor.
 Show all your necessary workings in the appendix. Best to use geometric mean or
compound annual growth rate (CAGR) method. CAGR is a better measure of return
over time. Arithmetic average annual return ignores the effects of compounding and
it can overestimate the growth of an investment. CAGR, on the other hand, is a
geometric average that represents the one, consistent rate at which the investment
would have grown if the investment had compounded at the same rate each year.
Refer to the brief notes in Appendix A on arithmetic mean versus geometric mean
calculation.
 For a two assets/shares portfolio:
Portfolio return is calculated by: E(Rp) = WAE(RA) + WBE(RB) = WAE(RA) + (1 –
WA)E(RB)
Portfolio variance is calculated by: σ2p = W2Aσ2A + W2Bσ2B + 2WAWBσAσBρAB
 For a three assets/shares portfolio:
Portfolio return is calculated by: E(Rp) = WAE(RA) + WBE(RB) + WCE(RC) Portfolio
variance is calculated by: σ2p = W2Aσ2A + W2Bσ2B + W2Cσ2C + 2WAWBσAσBρAB +
2WAWCσAσCρAC + 2WBWCσBσCρBC

Part (a) (3)

 Show all your necessary workings in the appendix. Please read your text book
(Smart, Gitman and Joehnk (12th ed), Chapter 5 Modern Portfolio Concepts) and
other supplementary readings in your Course Plan to get the examples and insights
on how to find the correlation coefficient between the returns of two shares.

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UKFF3283 Portfolio Management Oct 2019/2020

UNIVERSITI TUNKU ABDUL RAHMAN

LKC FACULTY OF ENGINEERING AND SCIENCE

Part (a) (5)

 Please read and refer to the user guides for plotting the portfolio (two/three/five-
share) efficiency frontier and identify the point of optimal portfolio using MS
Excel which will be shared by tutor.
 Analyze and investigate the shape on the curve that you have plotted. Evaluate the
implications of this curve towards the risk faced by the investor. Identify the point of
optimal portfolio (point P from the figure below) from the tangent between Capital
Market Line (CML) and the frontier.

 The P portfolio is known as the Market Portfolio and is also the most diversified
portfolio. It consists of all shares and other securities in the capital market.
 The CML equation is: RP = IRF + (RM - IRF)σP/σM
Where,
RP = Expected Return of Portfolio
RM = Return on the Market Portfolio
IRF = Risk-Free rate of interest
σM = Standard Deviation of the market portfolio
σP = Standard Deviation of portfolio
(RM - IRF)/σM is the slope of CML. (RM - IRF) is a measure of the risk premium, or the
reward for holding risky portfolio instead of risk-free portfolio. σM is the risk of the
market portfolio. Therefore, the slope measures the reward per unit of market risk.

Part (b)
 You need to decide how to find the "risk-free rate" accurately and justify your choice
or estimation from BNM (Bank Negara Malaysia) website or Bloomberg. Risk free
rate may obtain a well from Bloomberg.
 You need to justify the most appropriate figures for the "equity risk premium" (Rm-
Rf). Noted that you may need to calculate it yourselves. Please read your text book
(Smart, Gitman and Joehnk (12th ed), Chapter 5 Modern Portfolio Concepts) and
other supplementary readings in your Course Plan for initial guidance on research in
this area.

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UKFF3283 Portfolio Management Oct 2019/2020

UNIVERSITI TUNKU ABDUL RAHMAN

LKC FACULTY OF ENGINEERING AND SCIENCE

 You need to decide upon the most appropriate equity beta for each year in the
question. The yearly beta will be sufficient to represent for four (quarterly) estimates.
 When using the CAPM [E(Ri) = Rf + βi(E(RM) - Rf)] to calculate your "required" (or
benchmark) returns you must factor into your calculations changes in the risk-free
rate, the equity risk premium and the equity beta that have occurred over the six
years’ time period under consideration.
 You must analyze on both the size and sign of the abnormal returns or alpha (Actual
(TSR) return - CAPM derived return) and evaluate the implications of these abnormal
returns for the validity of the Portfolio Theory/CAPM. Complement the abnormal
returns of the optimal portfolio in line with the buy signal from various charts and
technical analyses. Compare your findings with the research from various articles
and resources pertaining to the business, industry or the nature or setting of your
selected stocks. For instance, an article by:
Ling, R. L. B., & Chia, J. Y. (2016). Portfolio Diversification Strategy in the Malaysian
Stock Market. Capital Markets Review, 24(1), 38-67.

Part (c)
- Justify whether diversification is significant for your selected companies to expand and
to cast businesses’ uncertainty.
- Critique the difficulties of the practical application of Portfolio Theory, both from a
company and an investor perspective. These may include:
 the collection of data and estimation of key variables;
 choice of risk free rate, equity beta and equity risk premium in CAPM
 complex nature of portfolio theory calculations, for instance the correlation coefficient
and the standard deviation of a three/five-share portfolio
 practical limitations of the CAPM
 the assumptions and short-comings of the models;
 Key concerns on multi-variant versus univariate analysis.
 Issues of whether shareholders are fully diversified and the validity of the results.
- From fundamental analysis perspective, analyze the implications and challenges faced
by your selected firms with regard to the uncertainties/challenges in the overall
businesses’ operations and investment environment. Complement your findings by
aligning with:
 the portfolio risks and returns analysis part (a); abnormal returns part (b);
 the business or industry nature and settings;
 the internal and external factors which affect your stocks selection, and
 the macroeconomic environments, government policies implications and
developments in Malaysia which may influence the performance of your portfolio
investment in overall.

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UKFF3283 Portfolio Management Oct 2019/2020

UNIVERSITI TUNKU ABDUL RAHMAN

LKC FACULTY OF ENGINEERING AND SCIENCE

APPENDIX A

Arithmetic average rate of return versus geometric rate of return

Stock E had the following end-of-year stock prices over the last five years and paid
no cash dividends:

Year End-of-year stock prices of Stock E

1 RM15
2 10
3 12
4 23
5 25

Compute the arithmetic average rate of return and geometric rate of return earned by
investing in Stock E over this period.

The arithmetic and geometric returns for Stock E are as follows:

F G = 1+F
Time Price Return Notes
1 A RM15
2 B RM10 -33.33% = (B - A)/A 0.6667
3 C RM12 20.00% = (C - B)/B 1.20
4 D RM23 91.67% = (D - C)/C 1.9166
5 E RM25 8.70% = (D - C)/C 1.0869
Sum = 87.03% product = 1.67
count = 4 count = 4
arithmetic average = 21.76% geometric average = 13.62%

While Stock E lost money between t  1 and t  2, and so generated a 33.33%

return, it earned positive returns for the other 3 years (including a stunning 91.67%
return over the third period).

The arithmetic average simply adds the four returns, then divides the sum by 4; this
average is 21.76% (between the minimum of -33.33% and the maximum of 91.67%).

Because there is variability in the return series, Stock E’s geometric average return
will be less than its arithmetic average. We can find the geometric average as:
Geometric return = [(1 + return1) × (1 + return2) × (1 + return3) × (1 + return4)]1/4 - 1
= [(0.6667) × (1.20) × (1.9166) × (1.0869)]1/4 - 1 = 13.62%.

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UKFF3283 Portfolio Management Oct 2019/2020

UNIVERSITI TUNKU ABDUL RAHMAN

LKC FACULTY OF ENGINEERING AND SCIENCE

Or, alternatively, the geometric mean return can compute with CAGR (Compound
Annual Growth Rates) using the following equation:
CAGR = (End Value/Start Value) ^ (1/number of years) – 1
= (25/15) ^ (1/4) – 1 = 13.62%

This calculation tells us that we would be indifferent between earning the actual
series of Stock E’s returns (-33.33%, 20%, 91.67%, and 8.7%) and simply earning a
constant 13.62% four times in a row. We can prove this as follows:
Actual performance = RM15 × (0.67) × (1.20) × (1.92) × (1.09) = RM25.24
Comparable performance = RM15 × (1.1389)4 = RM25.24

This won’t work if we attempt to compound the arithmetic average:

Not comparable performance = RM15 × (1.2176)4 = RM32.97.

Thus, if we wish to describe the multi-year behavior of this stock, we should

choose the geometric average as our measure (as we always should when
considering multi-year periods). However, if we wanted to estimate what we might
earn over the next, single year (or any future single year from a comparable
period) from this stock, we’d use our single-year estimator, the arithmetic
average.

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