On the other hand, through screening and checking market activities regarding the diversification of investment portfolios, pointing out all the pros and cons, challenges and opportuniti
Trang 1INTRODUCTION
1 The urge of dissertation topic
After more than 15 years of evolving and developing, the Vietnam
stock market has marked significant changes in market size and sophistication
as one of the fastest growing markets amongst the frontier markets and
emerging markets The strong, solid growth in the size of Vietnam stock
market has played the key factor in the sustainability of the capital market, as
a channel for mid- and long-term investments
During the 2000-2005 period, Vietnam stock market capitalization
only accounts for approximately one percent of the nation’s GDP This
measure, however, soared to account for 22,7% of GDP in 2006 and again to
43% of GDP in 2007 Total stock market capitalization reached 1,64 trillion
VND ($72 bondion) in year 2016, an increase of 345.000 bondion VND
(26,6%) or $15 bondion compared to the end of 2015 Despite the overall
incredible steps forward of the market, several problems remains with market
volatility and limited liquidity, especially during correction or recession
periods Moreover, products listed on the stock market are limited in
variations and of low quality, therefore incapable of meeting the desire of
investors to diversify their investment portfolios and to hedge for any
investment risks (due to lack of derivative products) Other market add-on
services are also limited (such as lack of short-selling orders, margin
borrowing, forward sales…); the level of market transparency has not met
public investors’ requirements
In a fast growing yet highly volatile market, the need for a systemic
market rationale for market management (securities companies, funds
management companies, mutual funds…), along with experiences gained in
the process of selecting and implementing diversification methods is imminent On the other hand, through screening and checking market activities regarding the diversification of investment portfolios, pointing out all the pros and cons, challenges and opportunities which affect diversification activities in Vietnam stock market in both direct and indirect manners is highly necessary; that will contribute much to the efficient use of capital resource, help lessen the risks associated with investment activity and promote higher level of efficiency for both investors and the whole market, thus lead to sustainable economic growth Being able to systemize from the summaries of all research work done in financial management, capital resource allocation, and investment diversification play the key role in developing and perfecting further studies in this expertise in Vietnam
2 Overview of Foreign Studies
2.1 Foreign Studies
Portfolio diversification theory has been the subject of theoretical and empirical studies all around the world in many variations; the results, however, vary depending on the nation and time period in which the study is conducted For example, Lee, Fah and Chong (2016) used CAPM model as well as the Markowitz’s Modern Portfolio Theory to examine the level of efficiency of portfolio diversification in Malaysia; Verchenko (2000) applied simple correlation and co-integration analyses to measure the correlation of stocks in 10 European emerging markets: Ukraine, Lithuania, Estonia, Latvia, Poland, Hungary, Slovenia, Russia and Czech Republic; Zaimovic, Berio và Mustafic (2017) applied Markowitz’s Modern Portfolio Theory and PCA technique to examine the interest and level of efficiency of portfolio diversification in emerging markets of South East Europe; Zhou (2010) examined the level of portfolio diversification from the perspectives of the
Trang 2Chinese investors; Hallinan (2011) applied Markowitz’s Portfolio Selection
(1952) and the summary of the Modern Portfolio Theory in order to construct
six different portfolios (containing stocks of emerging markets); Porwal
(2014) applied Markowitz’s Portfolio Theory (1952) to study the
characteristics of the frontier markets in comparison to emerging markets to
maximize outcome of investors’ portfolio diversification; Randolph (2011)
applied Markowitz’s Modern Portfolio Theory (1952) to examine the portfolio
diversification of Africa’s frontier stock markets; Hearn and Piesse (2008)
applied three different models, such as non-normal distribution model,
GARCH model, and CAPM model to analyze the possibility of maximal
portfolio diversification by combining South Africa’s stock market (the
strongest nation in the SADC community) and such in Swaziland, Namibia
and Mozambique (smaller nations in the SADC community) in the period of
1992-2007; Gupta, Jithendranathan and Sukumaran (2005) applied the
GARCH model to construct an optimal diversified investment portfolio for
Australian investors to examine the benefits of investing in African frontier
market; diversification when an investor from an ASEAN country only
invested in a country’s index fund or isolated stocks; Baig, Bilal and Asiam
(2016) examined the correlation among different stocks in such emerging
markets as India (SENSEX) and those in such frontier markets as Pakistan
(KSE100) and Sri Lanka (CSE) in order to explore possible efficient
investment portfolios
2.2 Domestic Studies of the Topic
Theoretical and empirical researches regarding the portfolio
diversification theory in Vietnam are limited Specifically, Vo Thi Thuy Anh
(2012) applied Markowitz’s Modern Portfolio Theory to determine the
outperforming stocks The author used actual database during 2009-2011
period for listed stocks on HOSE and HNX before December 31, 2008 Trieu
Kim Lanh (2011) applied Markowitz’s theory to calculate overall expected returns and investment risk on the Vietnam stock market, thus weighed the appropriate capital resource contribution for the investment portfolio Ngo Dang Hoang (2013) applied the Modern Portfolio Theory to construct an efficient investment portfolio on the Vietnam stock market Le Quy (2013) combined Markowitz’s theory and top-down stock analysis method to construct an efficient investment portfolio for personal investors Hoang Thanh Duong (2005) applied Markowitz’s Modern Portfolio Theory to test for the efficient frontier, optimal investment portfolio, and the market curve from 04/20/2004 – 02/23/2005 Vo Thai Phong (2011) applied Markowitz’s Modern Portfolio Theory to construct an efficient investment portfolio with listed stocks on HOSE using data observations from 2004 to 2011 Tran Van Tri (2015) applied th CAPM model and Markowitz’s Modern Portfolio Theory to test for the construction and management of the investment portfolio using data from HOSE and HNX from 2008-2013 Truong Dong Loc and Tran Thi Hanh Phuc (2012) examined the interest-risk relationship of the listed stocks on HOSE based on CAPM model using HOSE index data and prices of 80 listed stocks from 01/02/207 to 12/31/2009…
2.3 The Gaps in Research Topic
Domestic researchers have based their work of investment diversification on the Modern Portfolio Theory However, empirical research
on the Vietnam stock market has been limited, with small scope of investigation on isolated groups of stocks No research has covered all actual applications of investment diversification on the Vietnam stock market
One of the few research works on portfolio diversification on Vietnam stock market conducted recently is “Conducting and Managing stock portfolio in Vietnam” by Tran Van Tri (2015) However, this research work does not cover all theories on investment portfolio diversification, pros and
Trang 3cons of each theory, and applications of those theories on stock portfolio in
other countries with market functions similar to that in Vietnam This research
also does not mention the investment portfolio diversification in Vietnam in
full scale, including market and legal matters Tran Van Tri’s research (2015)
only reaches out to explore the technical aspect of conducting and managing
stock portfolio Besides, Tran Van Tri’s research (2015) only examines the
CAPM model on investment opportunity set and does not summarize any
take-away lessons on constructing and managing diversified investment
portfolio in emerging and frontier markets that are similar to Vietnam;
risk-free assets and strings of research topic are not covered in the work as well
This is the vital gap in which this research will continue to explore to
fit in with the Vietnam market
3 Purpose of the Research
Given the academic work and empirical evidences of the Vietnam
stock market mentioned above, this dissertation focuses on systemizing all
theories on investment diversification, as well as summarizing empirical
research and concluding the investment diversification in such similar markets
as Vietnam (emerging and frontier countries) Besides, this dissertation
attempts to clarify actual investment diversification in financial organizations
and investors, thus points out the results as well as the drawbacks and their
causes On the basis of checking and summarizing all theories of investment
diversification that are suitable for Vietnam stock market, two major theories
used to construct and implement an investment portfolio in Vietnam are the
CAPM model and Markowitz’s Modern Portfolio Theory
With the objective of optimizing the allocation of assets to construct a
diversified investment portfolio in Vietnam stock market during 2007-2017
period, this dissertation attempts to verify the result of the constructed
diversified investment portfolio and compare it to the overall performance of
Vietnam stock market With the derived result of the test, the author attempts
to conclude the benefits of applying the portfolio theories in constructing and managing the diversified investment portfolio in Vietnam
4 Subject and Scope of Research
4.1 Subject of Research
The dissertation focuses mainly on summarizing theoretical models and empirical evidences on investment diversification collected from emerging and frontier markets to apply accordingly to the situation of Vietnam stock market and suggest appropriate investment strategies for professional investors Upon the theoretical foundations and empirical research previously done, the dissertation suggests possible market situations and legal matters to help professional investors adequately allocate their capital assets and diversify their investment portfolios in Vietnam market during 2007-2017 period
Moreover, the dissertation compares the outcomes of based investment diversification in several markets in order to conclude a common pattern as well as typical characteristics of each of the markets (including those in emerging and frontier markets) Therefore, the dissertation concludes a common pattern in investment diversification, pros and cons of the application of principles of investment diversification in emerging and frontier markets
theoretical-4.2 Scope of Research
The dissertation focuses on investment diversification in Vietnam stock market by describing, comparing, and analyzing investment strategies used by active local and foreign investment funds/investment management companies However, due to limited data sources, the dissertation emphasizes
Trang 4specifically on investment strategies used by investment funds during 2007,
2008, 2016, and the first half of 2017
Based on the scope of research, the author researches, constructs, and
reallocate financial resource in order to diversify investment portfolio based
on various penetration methods and recommendations suitable for stock
market in Vietnam
5 Research Methods
The dissertation applies two different research methods to analyze the
objectives of the research, which are:
5.1 Non-parametric Method: Non-parametric method does not
require that the population being analyzed meet certain assumptions, or
parameters, combining with other mathematical model and the matrix
programming, to solve for the proportions of each of the stocks in the
investment portfolio using Solver function in Excel This method solves for
such objectives of the research as: (i) risk-free yield and (ii) short selling
strategy On that basis, the research calculates levels of efficiency and risk
associated with the diversified investment portfolio Discounted cash flow
method is also applied in the research by using “Bootstrapping” technique to
convert data to risk-free in alignment with stock data
5.2 Parametric Method: Parametric method, run by Eviews 8, is
used to parameterize the population of stocks returns and to test for the
randomness of the market and the normal distribution of data set of stocks
returns The use of this method also allows the author to run a regression
model to test the correlation between the efficiency of the portfolio and that of
the market On that basis, the author applies the CAPM model to test whether
the return rate of a non-parametrical diversified portfolio is proportional with
that of the market Therefore, the method should point out actual empirical evidence for each unique investment situation
6 Composition of Research: The dissertation consists of three
chapters in which the research results are presented and recapped
CHAPTER 1: REASONING FOUNDATION OF PORTFOLIO DIVERSIFICATION ON STOCK MARKET
1.1 Overview of the Portfolio Diversification
The author summarizes the definitions and forms of the stock portfolio diversification such as types and subtypes of assets, aspects of an economy, among different funds, different economies, different currencies, durations of investments, quality of investment assets and financial tools
1.2 Basics of the Portfolio Diversification
According to Ongkrutaraksa’s summary (1996), Modern portfolio theory involves the allocation of capital assets (both underlying assets and their derivatives) in diversifying an original investment portfolio From 1950
to 1970, the theory of portfolio diversification and the single factor model, based on the multivariate effect (MVE), have been the key factors in allocating and diversifying assets in a portfolio This theory was originated by Markowitz (1952, 1959) and developed further by Sharpe (1963) Other theories related to this work, such as the CAPM model developed by Sharpe (1964) and Lintner (1965) and the arbitrage pricing theory (APT) – the foundation for the multiple factors model developed by Ross (1976), were derived from MVE The three theoretical models are closely related to one another in diversifying investment portfolio
Trang 5In chapter 1, the author describes the following variations of portfolio
diversification: (i) modern portfolio theory; (ii) Tobin’s and Sharpe’s portfolio
theory; (iii) factor model; (iv) CAPM model; (v) arbitrage model; and (vi) the
Black-Litterman model The performance measures of portfolio
diversification are summarized as follow:
(i) For non-validation portfolios: the calculation is the return gain
divided by the standard deviation of return Popular indices include the Sharpe
ratio, information ratio (IR), Modigliani and Modigliani ratio (M&M), Sortino
ratio (SR), Treyno ratio (TR), value at risk ratio (VaR), Jensen’s Alpha ratio,
Treynor & Mazuy ratio (T&M), and Henriksson & Merton ratio (H&M)
(ii) For validation portfolios: the CAPM model, with the addition of
new risk factors from the multiple factors model, is used to measure portfolio
diversification efficiency In fact, many researchers agree that the sole CAPM
model (risk-free rate) is insufficient in measuring the level of efficiency of a
diversified portfolio As a result, macroeconomic, business fields, and
business unique factors are factored in the multiple factors model to derived a
more confident estimation of the portfolio diversification theory Fama and
French (1992) added business size variable and the book-to-market ratio to the
theory Carhart (1970) suggested the use of momentum effect Other
macroeconomic variables such as interest and inflation, investors’ behaviors
and methods of allocating assets and diversifying investment portfolio
(depending on the size of market capitalization and market growth rate) are
also factored into other diversification theories Those variables are mainly
accounted for and factored into the Fama-French model, Carhart model,
Jensen’s Alpha model, and GARCH model
1.3 Drawbacks of the Portfolio Diversification
The MVE model has three main drawbacks: (1) the portfolio optimization process may lead to a portfolio being excessively concentrated; (2) the model may not sufficiently explain and account for market shocks; (3) the corner solution, a major drawback of a model when applied in actual cases, happens when investors accept the short selling position of some of the assets in an investment portfolio, which lead to variables of those assets take value zero or negative (Black & Litterman, 1992) In reality, short selling is legally restricted in many countries
The CAPM model: Elbannan (2015) insisted that the CAPM model was criticized in many forms of research because it accounts for risk-free rate without limits When constructing a diversified portfolio in a specific time period, investors will only pay attention to the risk-return trade off of that period; meanwhile, the beta of CAPM model explains all risk assets by accounting for expected rate of return and all market variables
The APT model: the APT is incapable of accounting for the risk factors that affect rate of return of assets in a diversified portfolio
The Tobin’s Q model: the drawback of the the q coefficient is that if the market does not adequately value the companies in one period, then revaluation is required in the next period; that means the μ in Tobin’s Q model is rather large
The Black-Litterman model: legal risk increases due to lack of coordination among guests’ situations, market expectation and company/industry analysis
The author concludes that each model has its own drawbacks Therefore, the modern portfolio theory with all of its components and experimental results in certain situations are somewhat overstated But
Trang 6without the theoretical foundations to assess, researchers will be unable to
explain the logics behind asset pricing methodology and rates of return of the
main financial assets in a diversified investment portfolio
1.4 Research Application on Portfolio Diversification in the
World
The author states empirical evidences conducted when applying
portfolio diversification models to actual case studies in the emerging and
frontier markets The effect of investment portfolio diversification in such
countries is much greater than that in developed countries due to low
correlation However, in order to optimize the effect of portfolio
diversification, besides the application of theoretical models, investors need to
look into all of the unique characteristics, opportunities and drawbacks of
each market to exploit any possible investment chances Researchers have
come to an agreement that frontier market has low level of integration;
therefore, investors can benefit from investment portfolio diversification Yet
high transaction fees and barriers to the market may concern investors when
making decisions in diversifying their portfolio in such market From
empirical evidences and actual research results, the author has taken away
some lessons for Vietnam stock market
1.4.1 From Vietnamese Investors’ Perspectives
The Vietnamese investors may apply the theories of investment
portfolio diversification to explore the optimal investment portfolios based on
types of industries and nations Nonetheless, when researching investment
portfolio diversification, investors should take the following limits and
validations into account:
Firstly, the randomness of rates of return because many emerging
markets do not have sufficient data to construct a normal distribution analysis;
Secondly, the business management cultures vary in different markets
with different forms of custom and law For example, some markets allow for short selling of stocks and some do not (e.g China) Grasping the market uniqueness will help to make appropriate decisions;
Thirdly, the effect of globalization and free trade agreements can
influence investors’ decision If investors can exploit from a less integrated country with weaker correlation, they can benefit from more investment opportunities For example, the emerging and frontier markets are less integrated compared to those in developed countries However, barriers to market and high transaction fees are the limits of frontier markets;
Fourthly, the crisis spread may affect multiple markets Therefore,
more reliable analyses and forecasts are needed to lessen the risks for investors;
Fifthly, identifying the source of model factors that influence the
stocks’ rate of return (e.g factors are nation- or industry-ralated) will help investors choose the appropriate stocks for their portfolio;
Finally, potentials of currency crisis may happen in a highly
competitive world, when many economies use exchange rate mechanism to help boost exports and economic growth That may eventually lead to currency war “phenomenon” (devaluing currencies to boost exports), which negatively affect stock markets Being able to forecast economic trends will help investors minimize risks when constructing their diversified investment portfolio
1.4.2 From Foreign Investors’ Perspectives
Firstly, Vietnam stock market is classified as a frontier market, which
means low level of integration; therefore, investors should expect many opportunities for investment portfolio diversification Similar to other frontier markets, limits for entry exist such as barriers to market, high transaction fees,
Trang 7limited holdings of foreign investors, low currency convertibility, and
prohibition of short selling… These limits lessen the benefits investors could
achieve from investing into Vietnam, thus may lead to losing opportunities of
capital inflows into the country;
Secondly, despite the action from the Vietnamese government to
gradually clear out the above limits, compared to other emerging and frontier
markets, consideration for more open regulations to foreign investors is vital
in attracting capital inflows into Vietnam
CHAPTER 2: PORTFOLIO DIVERSIFICATION ON
VIETNAM STOCK MARKET 2.1 Legislative Framework on Portfolio Diversification
Legislative framework on the portfolio diversification activities,
which applies to financial and economic organizations and personal investors,
is relatively limited Current legal documents tend to stimulate the
diversification of investment portfolios in an indirect way, mostly to control
risk and capital adequacy and to serve the macroeconomic policies
2.2 Current Case of Portfolio Diversification on Vietnam Stock
Market
The author of this dissertation focuses on analyzing the current case
of portfolio diversification activities conducted mostly by financial funds: (i)
index funds, (ii) closed funds, and (iii) industries-based open-end funds
Conclusions derived from the research include:
Firstly, the Exchange Traded Funds (ETFs) have high level of
diversification in terms of the number of stock codes; however, the
profitability measures are rather low due to: (i) ETFs base their investment
activities on certain indices; (ii) ETFs have to abide by various regulations
upon their operations; (iii) the prohibition of short selling in Vietnam; (iv)
high level of volatility in macroeconomic environment, specially the exchange
rate; (v) stock borrowing and lending system (SBL) only allow depository members at VSD to borrow securities in case of after trading-hour correction orders to meet the liquidity requirement; therefore, the benefits of arbitrage trading for domestic ETFs are cleared out; (vi) investors find that spending a large amount of capital on the ETF certificate while having interest only in some stocks that reach the room limit is not an optimal investment option; (vii) margining is not allowed in the trading of ETF certificates; (viii) regulations and mechanisms for the publication of information of ETFs are unique with complicated procedures
Secondly, open-end funds have gradually replaced closed funds and have dominated in Vietnam stock market due to the fact that the repurchase of fund certificates is not mandatory for ETFs and that the duration of fund certificates is long These limits leave the investors with the need of capital no choice but sell their fund certificates on the secondary market; that is the main cause for the shift of capital from closed funds to open-end
Thirdly, although smaller in the number of funds on Vietnam stock market, closed funds have the advantages in the size of funds and better profitability measure sue to larger sources of capital and more efficient management
2.3 Analysis on Portfolio Diversification on Vietnam Stock Market
By examining the statistics on risks, return and other performance measures of the portfolio diversification activities on Vietnam stock market in the last five years, the author has concluded the following: the level of profitability (excluding (low) management costs of ETFs) from portfolio diversification is relatively low compared to the high level of risks; the level
of profitability (excluding (high) management costs of closed/open-end fund) from portfolio diversification of closed/open-end funds is higher than that of
Trang 8ETFs, and some funds perform better than the market with lower level of
risks; the level of portfolio diversification among all investment funds,
including closed/open-end funds and ETFs are high; therefore, the levels of
profitability and risks are well improved
The presence of the limits is mainly due to market problems such as
stocks with low quality, low market liquidity, limited market products and
services, small market size, lack of investor base in the repo market, lack of
credit rating agencies, and the underperformance of stock exchanges and
securities depository These limits explain the immaturity of the market and
affect the performance of the funds either directly or indirectly The problems
concerned with legislative framework also have an impact on the performance
of funds, such as the prohibition on the short selling of stocks, while failing to
promote investors’ incentive to make long-term investments and lacking
sanctioning mechanisms on market violations
2.4 Constructing and Examining the Theory of Portfolio
Diversification on Vietnam Stock Market
2.4.1 Recommended Theories of Portfolio Diversification
2.4.1.1 Justification for Choosing the Theories in the Case of
Vietnam Market
On the basis of portfolio diversification theories stated in Chapter 1,
the author chooses the Markowitz’s Modern Portfolio Theory to examine the
possibility of portfolio diversification application and its level of profitability
on Vietnam stock market, with additional examination on such two added
binding scenarios as: portfolio with risk-free securities (treasury bonds) and
portfolio with short selling option This research approach combines the
Markowitz’s Modern Portfolio Theory and the Tobin and Sharpe’s theory on
risk-free assets The author bases his approach on (i) the immaturity of
Vietnam market with unique characteristics of a frontier market, limits on objectiveness and asymmetric information, weak management, and the lack of legislative framework; (ii) limits of each of the models that make the use of one single model infeasible in reality; and (iii) the results of research works done in other emerging and frontier markets with similar conditions to the case of Vietnam In fact, other researchers have applied multiple models to examine the efficiency level of portfolio diversification on the basis of the Markowitz’s Modern Portfolio Theory
In chapter 2, the author applies the Markowitz’s Modern Portfolio Theory as well as Tobin and Sharpe’s theory and parametric model to examine the possibility of portfolio diversification application and its level of profitability on Vietnam stock market, thus seeks the answers for research questions in this dissertation
2.4.1.2 The Application of Modern Portfolio Theory (MPT) on Vietnam Stock Market
Maximization: Max Z E(RZ)+ rf*z0 with the condition Z’*C*Z = c, Z’*1N =1, or
Minimization: Min Z Z’*C*Z with the constraint E(RZ)+ rf*z0 = c, Z’*1N =1 and zi>= 0 (i=0,N)
Where:
E(RZ): expected return of the stock portfolio N: number of stocks in the portfolio
rf:: risk-free rate z0: weight of risk-free securities in portfolio
Trang 9Z and Z’ are transpose matrices, representing the weights stocks and
risk-free securities in the portfolio
C: covariance matrix of returns among stocks
1N: unit of matrices (N*1)
There are two special constraints: (1) prohibition of short selling: zi>=
0 for all i; (2) the absence of risk-free securities: z0 = 0
2.4.1.3 Conditions on the Examination of Portfolio Diversification
in Vietnam
Despite the salient advantages and the ease of usage and application,
the MPT still depends on some assumptions that require investors’ attention
(Reto, 2003), for example: (1) investors intent to maximize their profits and
minimize the risks; (2) investors only look at the expected return and risks
measured by the standard deviation when making decision; (3) all investors
have the same risk and return expectations; (4) all investment decisions are
made in the same period of time; (5) all investors have the same access to
information (no market flaws from asymmetric information); (6) transaction
fees and price gap are negligible; (7) returns of all assets are normally
distributed; (8) no restrictions on market actions and asset positioning; (9) no
barriers to lending or borrowing of risk-free assets
No theoretical models meet all nine assumptions above in actual
market condition However, the purpose of the research is to determine
whether the assumptions are feasible in actual case studies In case of
Vietnam, the author assumes: assumptions (1) to (6) are met; the stocks that
meet assumption (7) will be chosen to construct a portfolio (meaning returns
on those stocks meet the standard deviation requirement); assumptions (8) and
(9) are unique characteristics of Vietnam stock market and will be tested during the examination of the MPT
2.4.2 Phases of Research
Based on the Vietnam macroeconomic state and the stock market during 2007-2017, the author selected data in years 2007, 2008, 2016, and the first half of 2017 to conduct the research on and examine portfolio diversification on Vietnam stock market The data selection ensures the representation of different phases of the market (market boom in 2007, recession in 2008, and recovery and stable growth during 2016-2017) On the other hand, this selection covers main phases of the history of Vietnam stock market, including the history (years 2007 and 2008) and current market situation (years 2016 and 2017) to forecast the future Therefore, the data selection allows for the close grasp of market states to derive the most appropriate answers to the objective questions of the dissertation
2.4.3 Constructing a Diversified Portfolio by using parametric Method
non-2.4.3.1 Data Description and Analysis Method
a Stock Data Description: on January 1st, 2007 (the beginning
period of the research) there were 108 listed stocks on the HOSE Therefore, the author takes into account all of the stocks to run a standard deviation analysis on return of each of the stocks 24 stocks that meet the stochastic condition and the standard analysis will be chosen for the research model
Stock prices are factored in to the model to eliminate any common impacts that may distort the return rate such as dividends of stocks or stock splits Sources of data include Reuters and Bloomberg databases; whereas Reuters edits the data, so the daily return rate of each stock is precise There
Trang 10are total 865 observations for each stock in 2007, 2008, 2016, and the first
half of year 2017
b Data on risk-free securities: data on risk-free securities included
solely Treasury bond with one year to maturity: Because the yield on 1-year
bond is calculated on a yearly basis, the author coverts back to daily basis by
dividing yearly yield by the number of actual trading days of year For
example, on January 1st, 2008, yield of 1-year Vietnam Treasury bond is
7.85% p.a (source: Bloomberg) with no trade history in year 2007 The
number of actual trading days in 2007 is 248 days The daily-based yield is
calculated as: 7.85%/248 days = 0.032%/day
For years 2008, 2016 and the first half of year 2016, the same
calculation method is applied In year 2008, there is a trade history of 1-year
Treasury bond, so the average yield on bond in 2008 is discounted by using
Bootstrapping technique to be equal 12.67% p.a.; the number of actual trading
days is 245 days; daily yield of Treasury bond is 12.67%/245 days =
0.052%/day Daily yield on bond in 2016 is 4.34%/251 days = 0.017%/day
and in the first half of year 2017 is 3.92%/250 days = 0.016%/day
2.4.3.2 Analysis on the Standard Deviation of Expected Return
and the Stock Picking for Diversified Portfolio
With Eview 8 software, the author analyzes the Jarque-Bera (JB) test
on standard deviation with 95% confidence interval, taking into account 24
stocks that meet the stochastic condition throughout the whole research period
(2007-2017) to construct a diversified portfolio The author also examines the
correlation among the chosen stocks and concludes that due to low level of
correlation, the trading prices of stocks are highly random, and the market
decides the trading prices Therefore, all of the 24 stocks can be factored in to the portfolio diversification model
The bases for choosing stocks are: (1) the optimal number of stocks required in constructing a diversified portfolio lies between 10 to 30; therefore, 24 stocks is a sufficient number; (2) these stocks meet the standard deviation condition as mentioned; (3) low level of correlation among these stocks means the trading prices of stocks are highly random; and (4) these
stocks are highly liquid throughout the research period
2.4.3.3 Constructing a typical Diversified Portfolio and Examining the Performance compared to the Market
A typical investor using the MPT pays special attention to the risks and return of the portfolio That shows in the average return rate and standard deviation of return All calculations in the dissertation are based on daily data and done with the use of Solver in Microsoft Excel
In 2007, although market return was not the highest rate, the market risks were the lowest (standard deviation of the VNI index) compared to other stocks Hence, the author points out that in order to achieve low risks, investors should diversify their investment portfolios, rather than investing in single stock By applying portfolio diversification theory, the author can establish the efficient frontier when only stocks or both stocks and risk-free assets appear in the model
The minimum variance portfolio (L1) was suggested in 2007 by diversifying the investment portfolio with portfolio risk at the lowest level of 1.394% The L1 portfolio also brings in higher return relative to the VNI market performance (return rate: 0.151% > 0.099% and risk: 1.394% <