Portfolio selection in vietnamese security market a multiple objective optimization approach

THE NECESSITY OF TOPIC Developing an optimal portfolio, maximizing expected return under given risk,has long been an active research topic among academicians and business practitionersfo

28.evaluation-and-of-CASE-Blanc-

Tô Thị Thuỳ Anh Phạm Anh ĐứcClass: AC2015D

Science advisor: Asso Prof Nguyễn Hải Thanh

1 THE NECESSITY OF TOPIC

Developing an optimal portfolio, maximizing expected return under given risk,has long been an active research topic among academicians and business practitionersfor decades, specifically since the pioneering work of Markowitz in 1956 There havebeen researchers continuously taking part in investigating this topic since then

For very firstly, in Markowitz’s mean-variance model, estimating the pairwisecorrelations between all stocks are needed as input data to build up the optimalportfolio13 Therefore, between 1992 and 1993, a research on performance of portfolioselection in Hong Kong stock market was also done by some researchers: Kin Lam,Henry M.K Mok, Iris Cheung and H.C Yam14 Recently, in 2012, Colby Wright has

13 Nguyen Hai Thanh and Nguyen Van Dinh, Portfolio Optimization: Some Aspects of Modeling and

Computing

14Kin Lam, Henry M.K Mok, Iris Cheung and H.C Yam, Family groupings on performance of portfolio

selection in the Hong Kong stock market, published on September 1994.

203

already researched how to perform optimal portfolio problems by using mathematicalprogramming in Excel15.

Hence, there are several reasons for researchers to keep going on diggingdeeply in this topic The most primary one is that this topic plays a very important part

in helping practitioners run better in stock market Other motivation is that throughinvestigating, researchers have a good chance to build up knowledge as well as themajor in university Therefore, researchers are able to build up knowledge in relevantfields

In short, with all the above reason, we have chosen the scientific researchingtopic, which is expected to contribute to other following researches in other markets:

“Portfolio seclection in Vietnamese security market: A multiple-objetive optimization approach”.Method contributes to increase the accuracy in forecasting

investment with the effort of saving unexpected costs

15 Colby Wright, Portfolio Optimization in Excel on Jan 11, 2012 on youtube.com

204

CHAPTER 1: GENERAL DOCUMENTATION AND THEORETICAL FUNDAMENTALS ABOUT EXISTING FORECASTING METHODS.

1.1 THEORETICAL FUNDAMENTALS

The combination of scientific methods and experience, the qualitative ofinvestors, individuals involving in market in general and Vietnamese market inspecific, is one of the important premises creating scientific forecasting or anartistic predict about the variability of investing objectives in future market

Overall, all investors have not evaluated one-sided about the growth orreduction of investing objectives in market in a specific condition that every otherexisting factors are constant Actually, investors generally focus on predict thevariability of investing objectives based on dependent variables, which areinterdependent The most common interdependent variables are expected returnand risk16 However, in practice, almost portfolio selection methods consider thecomparison between two objectives Specifically, methods have to continuouslyrepeat regarding to the random pairs of market’s objects

Results of forecasting portfolio selection are not totally accurate Eventhough predicting methods are carefully processed, it still has errors, which isdependent on the actual variability in the future Hence, it is seldom to have anextremely accurate method, compared to actuality Nevertheless, portfolio selectionoptimization still is one of premising conditions, directly affecting the process andresults of investment

16Lawrence J Gitman, Chad J Zutter, Principles of managerial finance 14th edition, published January 2014.

205

1.2 RESEARCH METHOD

1.2.1 Qualitative method

Consult the majority advices of investors and potential investors.

Personal ideas of investors’ majority are consulted and gathered Thisrepresents the market’s investing demand The advantage of this method is that itcan catch the majority of expectation of demanding source, then, stimulatinginvestors attending the market The drawback of method, however, is that investorsare directly affected by the market’s variability, so they usually underestimate toreduce risk This method is suitable for initial published

Consult financial advisors.

Each advisor gives independent predict, then, the average predict iscalculated; or a group of advisors discuss and lead to an advice This methodquickly gives out the predict data, collect a number of objective idea, eliminaterelatively subjective ideas The disadvantage is that the classification of objects isnot really clear

1.2.2 Quantitative method.

“Modern Portfolio Selection” was primarily called Mean-Variance Analysis.Expected return of portfolio is calculated along with risks represented by standarddeviation and the interaction among securities (covariance and correlation) Then,

“Portfolio Diversification” was formed Almost important premises of investors arebased on two variables: Expected return and risk17

1.3 GENERAL DOCUMENTATION ABOUT OPTIMIZING MULTIPLE OBJECTIVES–PORTFOLIO SELECTION.

Optimizing multiple objectives-portfolio selection is affected by somefactors Indeed, the interaction between Expected return and Risk is the mostimportant

Nowadays, in Vietnamese market, predicting optimal portfolio selection hasnot concentrated on cases of 3-4 objects When investors bring out plans, they oftencombine historical data and financial advisors’ experience for 1-2 objects.Therefore, it is essential to build up an arithmetic and statistical model18

Optimizing multiple objectives-portfolio selection is not able to avoidgeneral characteristics of forecast Although we do not expect predict perfectlyaccurate, we desire errors among predict data not too large Model still givesinvestor confidence to make investing decisions

18Lawrence J Gitman, Chad J Zutter, Principles of managerial finance 14th edition, published January 2014.

207

CHAPTER 2: THEORETICAL FRAME WORK

AND APPLICATION PROCESS 2.1 INVESTIGATING CASE

“Researching Strategy, including an actual experiment about a specific object

at present context by using diversifying evidence sources, is called investigatingcase.”19

Investigating case is applied for predicting optimal portfolio selection for twoobjectives including the four target securities (as decision variables) ACB, FLC, FPTand AAA20 in Vietnamese economy 2017-2018 Forecast is conducted in Vietnamesesecurity market generating premise to develop better model in other markets

2.2 DESIGN RESEARCH CASE

The aim of research case

Analyze predicting process and clarify characteristics of forecasting optimalmultiple objectives portfolio selection along with affected factors

Choosing research method

Mixed strategy is chosen to be researching method because it has thecombination between collecting data method, and quatitatively and qualitativelyanalyzing method

Duration of research

There is a limitation in researching duration However, there still exists thelength of time factors Then, the development and the variability of objectives throughperiods are obvious

19Mark Saunders, Philip Lewis & Adrian Thornhill.2010, “Phuong phap nghien cuu trong kinh doanh”,

Translator Nguyen Van Dung, Finance Publisher, page 156

20ACB: Asia Commercial Joint Stock Bank

FLC: Finace, Land & Commerce Group

FPT:The Corporation for Financing and Promoting Technology

AAA: An Phat Green Plastic and Environment Joint Stock Company

208

2.3 APPLICATION PROCESS.

Part 1: Choose samples for portfolio selection using CAN SLIM method to find out security desired to invest 21

C-current quarterly earnings per share

A-Annual earnings increases over the last five year

N-new products, management, and other new event

S-Small supply and large demand

L- Choose leaders over laggard stocks within the same industry

I-Pick stocks who have institutional sponsorship by a few institutions with recent above average performance

M- Determining market direction by reviewing market averages daily

Part 2: Develop optimal portfolio selection for two objectives.

Step 1: Using formula of Log return to compute continuously compounded interest

over periods based on data collected (Return)22

r=ln ⁡( FV

PV)

Step 2: Compute Excess return, Expected return and Standard Deviation.

1 Excess Return of Security of time t = Return of time t – Average Log Return of Security

2 Return = Average Log Return of Security

3 Standard Deviation (Using STDEV.P function in excel)

Step 3: Covariance Matrix23

Σ=1/n(XTX)Nis the number of scores in each set of data

X is excess return

XTis the transpose of X

Cov(X, Y) = Σ ( Xi - X ) ( Yi - Y ) / N = Σ xi yi / N

21A system for selecting stocks , created by Investor's Business Daily founder William J O'Neil

Mehdi Majafi, Farshid Asgari,“Using CANSLIM Analysis for Evaluating Stocks of the Companies Admitted in Tehran Stock Exchange”, Journal of American Science 2013.

22Wai-Sum Chan, Yiu – Kuen Tse (2013) Financial mathematics for actuaries, Mc Graw Hill Education (Asia) 23Wai-Sum Chan, Yiu – Kuen Tse (2013), Financial mathematics for actuaries, Mc Graw Hill Education (Asia).

209

N is the number of scores in each set of data

X is the mean of the N scores in the first data set

Xi is the i th raw score in the first set of scores

xi is the i th deviation score in the first set of scores

Y is the mean of the N scores in the second data set

Yi is the i th raw score in the second set of scores

yi is the i th deviation score in the second set of scores

Cov(X, Y) is the covariance of corresponding scores in the two sets of data

Step 4: Compare Expected Return and Standard Deviation based on Sharp rate Sharp

Rate = Expected Return / Standard Deviation24

Step 5: Compute Expected return and Standard Deviation based on Weight of

objectives, then, compute new Sharp rate25

Step 6: Using Excel Solver to compute weights in case Mean and Sharp rate are

maximized and Standard Deviation is minimized26

The weights already had found out is an optimal portfolio

CHAPTER 3: COLLECTING AND PROCESSING DATA

3.1.2, A (Annual earning over last five years– from 1/1 to 31/12 each year ) 28

24 , 18, 19 Portfolio Optimization in Excel - Colby Wright Published on Jan 11, 2012 on youtube.com

Current quarterly earnings per share

table (unit: EPS)

ACB:

In 2016 Income before tax were VND 1.667 billions, increased 27% from 2015.During 2016, net income raised 17% Service revenue also increased 27% almostfocus on personal customer and financial service, while reduced risk in credit Almostexpenses were used for improving information technology, maintaining brandingsystem however always controlled closely

In balance sheet, total asset, debit balance increased 16% and 21%

Profit after tax in Audited Consolidated Financial Statement of 2017 reached VND3.528 billions, increased 37% compared with 2016 thanks to good performance of itsbusiness lines and gain divestment of two companies FPT Digital Retail Join StockCompany and FPT Trading Company Limited.

AAA:

Profit after tax increased 92% compared with 2016 thanks to good performance of 2new factory, factory 6 and 7 and gain divestment of VBC and Yen Bai plastic andmineral corporation

3.1.3, N (New product, management and other new event)

ACB:

+ Privilege Banking Project: Project is holding the lines of supplying products,services and/or activities suitable to privileged customer segment to keep contact withcustomer

+ Transaction Banking Project: To raise non-term deposits, increasing non-creditincome collected from services fee, developing outstanding loan balance of individualcustomers and SMEs by sponsoring distributors

+ Developing business procedure ACMS

We can see that ACB is focusing on improving banking services and customer servicesmore than credit

+ Developing some potential field such as agriculture, industry

+Participating in social activities in order to improve corporation’s fame

FPT:

+ Promoting global development

+ Be a global partner of famous corporation in the world

+ Expanding customer list in Forbes 500

+ Improving international competing capability

AAA:

212

+Intensifying management, supervise manufacturing in order to raise worker’sresponsibility in each position, purpose is ensure safety, quality and saving forcompany.

+ Operating 2 factories, Factory 6 and 7

+Building Factory 8

+ Raising market share in Japanese, Australia, America market

3.1.4, S (Supply and Demand) 29

In our opinion, we choose stock in which Supply and Demand increase at least 50%because it shows that they have possibilityof increasing in price

30 23 Mehdi Majafi, Farshid Asgari, “Using CANSLIM Analysis for Evaluating Stocks of the Companies

Admitted in Tehran Stock Exchange” Journal of American Science 2013.

3 128,999,220 121,215,670 133,860,700 139,396,700 201

4 427,971,320 454,171,030 187,557,300 194,206,500 201

3 163,111,900 155,412,500 1,338,736,620 1,332,745,380 201

4 80,618,400 86,602,500 6,110,923,380 6,137,052,350

4, Standard Chartered Bank (Hong Kong) Ltd.

HNX-Index reached 111,61point raised 41.5% compared with 2016

In 2017, many famous company and banking jointed in stock market and helpedexpand Vietnamese stock market in size In December 19, Capital stock reached 3.360billion Vietnam dong, increased in 73% compared with 2016 equal to 74.6% GDP.About transaction, the value of transaction was 13.870 billion Vietnam dong in whichstock reached 4.981 billion Vietnam dong increase 63%

Beside that in 2017, business result in many corporation have many positive signalespecially banking, real estate, technologies and environmental protection product According to market movement, we believe that 2018 will be a successful year ofVietnamese stock market

3.2 Data processing and outcome analysis.

1 Mathematical model

For the sake of simplify maths to jude and comments about portfolios selectionactions It’s necessary to have some conventions about relative variables and to makeclear for some mathematics symbols33:

Ri = (R1, R2, R3, …, Rn) (matrix of n x 1 return variables)

W = (w1, w2, w3, …, wn) (matrix of n x 1 weights of portfolios)

μ = (μ1, μ2, μ3, …, μn) (matrix of n x 1 portfolios’s expected return)

32 Information on finance.vietstock.vn

33 All formular and constrains base on Colby Wright method to optimize portfolios selection

Portfolio Optimization in Excel - Published on Jan 11, 2012 on youtube.com

214