MARKOWITZ

Portfolio theory
 PORTFOLIO THEORY
 A portfolio or portfolio is a collection of several
types of investment securities. Weston and
Brigham (1994),
 A portfolio is a collection of investments in the
form of real assets or real assets as well as
financial assets. Agus Sartono (1996),
 A portfolio basically consists of various
investment opportunities, both investment in real
assets, financial assets or a combination of both.
 PORTFOLIO OF STOCK
 A Portfolio is a collection of investment securities.
"
 A portfolio is a collection of investments in several
securities.
 A portfolio is a diversification of investment
opportunities. "
 Return on portfolio realization = (Rp), is the weighted
average of realized returns on every single asset in the
portfolio
 Expected return portfolio = E (Rp), the weighted average
of the expected returns of every single asset in the
portfolio
 Portfolio Risk = var (Rp), is the return on asset variants
that make up the portfolio
 Covariance = (cov (Ra, Rb), a gauge that shows the
direction of movement of two variables
 Portfolio risk is influenced by four
factors:
 Risk of each financial asset (security)
 The proportion of investment in each financial
asset in a portfolio
 Covariance or correlation between investment
returns of each financial asset.
 The number of financial assets that make up a
portfolio.
 The expected level of return on a
portfolio
 The expected level of profit on a portfolio is the
weighted average level of profit of various assets
in the portfolio. While the main purpose of the
portfolio is to find the optimum combination of
various securities to obtain the maximum level of
profit.
 Return of Portfolio
 Return realisasi

Rp =

 Expected Return realisasi portfolio

E (Rp) =
If we have two shares and invest the funds in each
share (), and the remaining balance is (1-),
then the level of portfolio profit (Rp) for the two
shares

E(R p )  E(R A )  (1   )E(R B )

 Risk of portfolio
 Portfolio risk is indicated by the size of the
deviation of the expected level of profit.
 Portfolio risk is influenced by the risk of each
asset, the proportion of investment for each asset,
the correlation between investment returns and the
number of assets that make up the portfolio.
 Total Risk =
Diversified Risk + Undiversified Risk
Risiko
Portfolio

Diversibe Risk

Undiversible
Risk

Jumlah asset
 Risk of Portfolio
 Standard deviation is nothing but the root of the
variant, so first look for portfolio variants, using the
equation:

n 2
VAR(R p )    Ri  E(Ri)  pi
x1
Pi = probability of each condition
Ri = The profit level of shares to i and
E (R) = expected return of stock i
 CASE
 Forexample, there are two types of securities A and B. The
expected level of profit from securities A is 15% and
securities B is 25%. The standard deviation of the
profitability of each securities is 8% and 30%. If the
available funds are invested 30% in securities A and 70% in
securities B, then what is the expected level of profit from the
two stock portfolios:
 Calculation of expected portfolio profit = E
(Rp)

E(R p )  E(R A )  (1   )E(R B )

 (30%)(15%)  (70%)(25%)
 22%

So the expected profit level of the two stock portfolios is 22%.

 Now if the correlation coefficient between the
securities level of securities A and B is equal to one
or perfectly positive correlation, then the
standard deviation of the expected profit level of
the portfolio is:

 (R p )   2 A 2  2 (1   )rAB A B  (1   ) 2  B2
 Now if the correlation coefficient between the
securities level of securities A and B is equal to
one or perfectly positive correlation, then the
standard deviation of the expected profit level of
the portfolio is:

 (R p )   2 A 2  2 (1   )rAB A B  (1   ) 2  B2
 (30%) 2 (8%) 2  2(30%)(70% )(1)(8%)(3 0%)  (70%) 2 (30%) 2
 0,054756
 (R p )  23,40%
 What if the profit rate of the two securities was
perfectly negative correlated. what is the standard
deviation of the expected level of profit from the
portfolio?

 (R p )   2 A 2  2 (1   )rAB A B  (1   ) 2  B2
 (30%) 2 (8%) 2  2(30%)(70% )(-1)(8%)( 30%)  (70%) 2 (30%) 2
 0,034596
 (R p )  18,60%
 Meanwhile, the standard deviation of
portfolio profit levels if both securities A
and B do not correlate at all is equal to:

 (R p )   2 A 2  2 (1   )rAB A B  (1   ) 2  B2
 (30%) 2 (8%) 2  2(30%)(70% )(0)(8%)(3 0%)  (70%) 2 (30%) 2
 0,044676
 (R p )  21,13%
 From the above example, we can conclude
temporarily that the greater the positive correlation
between the expected level of profit from the
portfolio. Conversely, the greater the negative
correlation coefficient between the profit levels of the
two stocks, the smaller the standard deviation of the
expected profit level of the stock portfolio. Or in other
words we can reduce the level of risk by investing in
various stocks that have a negative correlation with
each other. Investing funds in various kinds of
securities like this is also called diversification.
PORTOFOLIO SELECTION
 In choosing a portfolio, investors will base their
selection on preferences for expected returns and
risks that investors are willing to bear
 The more conservative an investor, the more
reluctant he bears the risk of his portfolio choices,
the closer he gets to risk-free assets
 The more aggressive an investor is, the more
courage he bears the risk, so that his portfolio
choices will be closer to the portfolio on risk assets
PORTOFOLIO SELECTION
 Diversification is the key to optimal risk
management
 Analysis needs to be done considering the amount
of risk assets is unlimited
 How do investors choose the best risk portfolio?
 How do you use riskless assets?
 CHOOSE A PORTFOLIO
 Step 1: Use the portfolio selection model
                 Markowitz to identify optimal
combinations. Estimate the rate of
return (return) expected, risk, and
each covariance between returns

 Step 2: Select the final portfolio based on

level return preferences relative to
risk
 MARKOWITZ PORTFOLIO MODEL
 Forming a portfolio using the Markowitz model is
better than forming a portfolio with a naive
(random) approach.

 Using the Markowitz model, investors can utilize

all available information as a basis for optimal
portfolio formation.
 MARKOWITZ PORTFOLIO
MODEL
 Optimal diversification takes into account all
available information
 Portfolio theory with the Markowitz model is
based on 3 assumptions, namely:
1. A single investment period, for example 1
year.
2. There are no transaction fees.
3. Investor preferences are only based on
expected returns and risks.
 Markowitz Model
 Theoretically, the optimal portfolio is based on:
 Frontier Efficient Curves
 Indifference curves (Risk-Averse Preferences)
 EFFICIENT FRONTIER
 EF = various portfolio choices that can be formed
by investors to produce optimal combination of
securities
 EF is achieved in a portfolio that:
 Offering maximum profit at a certain risk level, or
 Offer a minimum risk at a certain level of profit
 EFFICIENT FRONTIER

kp
F
Efficient
Frontier
All Portfolios that can be
Opportunity formed from N securities
located within the boundary of
Set
the opportunity set (G, E, F, H)
H

p
 Investment Opportunity set (IOS), namely:
as a combination of real assets (assets in
place) and future investment options
 illustrates the breadth of investment opportunities
or opportunities for a company, but very much
depends on the choice of expenditure for the
company's interests in the future
IOS = Market Value
                  Book value
 INDIFERENS CURVE
 The indifference curves describe various portfolios
with a combination of expected returns and the
respective risks that provide the same utility for
investors.
 A curve that shows investors' risk-averse
preferences in choosing a combination of
securities
 The positive slope of the inde- pendent curve
illustrates that investors always want a greater
return as compensation for higher risk.
 KURVA INDIFFERENCE

U3
kp
U2
U1

Utility yg meningkat

p
 PORTFOLIO EFISIEN
U4

U3
U2
kp
U1

Portfolio yang efisien


Analisis
p
Portfolio
 LOOKING FOR EFFICIENT
FRONTIER
 For example, there are three securities under consideration,
namely: 1) AAA shares, 2) BBB shares, and 3) CCC shares.
The expected return of AAA shares is 14 percent, BBB shares
are 8 percent, and CCC shares are 20 percent. Suppose an
investor wants to create a portfolio containing these three
shares with a portfolio expected return of 15.5 percent. What is
the combination for this portfolio?
 By making portfolio weights for AAA shares 0.45, BBB shares
0.15, and CCC shares 0.4, investors can generate a portfolio
return of 15.5 percent.
E (RP) = 0.45 (0.14) + 0.15 (0.08) + 0.4 (0.20)
E (RP) = 0.155.
LOOKING FOR EFFICIENT FRONTIERS

 Variouscombinations can be created as in the

following table:

Kombinasi WAAA WBBB WCCC E (Rp)

1 0,65 0,05 0,3 15,5%

2 0,45 0,15 0,4 15,5%
3 0,15 0,30 0,55 15,5%
4 0,55 0,10 0,35 15,5%