Objectives & Aim of the Research
The objective of this research is to
understand the risk and the reward between various weighting of JCI and BINDO
in a portfolio. To understand the bond market movement and compare it to the
stock market movement and to test whether the theory of high risk, high gain is applicable in the Indonesian market.
The goal of this small research is
to be able to find an optimal portfolio return in the last five years and to
see whether the different market behaviour on bond and stock market. By
understanding the risk and return of the two most basic financial instruments,
analyst will be able to find the correlation and will be able to create an
optimal portfolio between the two instruments. The aim of the final product is
for investors to understand the risk and reward between the two instruments
(stocks and bonds), and compare the risk and reward between the two – whether it is rational for investors to put
X% of their portfolio in the stock market with X amount of risk.
Data and Methodology
The data used for this research are
monthly price movement of Jakarta Composite Index (JCI)[1]
and Bloomberg Indonesia Sovereign Bond Index (BINDO)[2]
from January 2012 until August 2017 (5 years and 8 Months) and both data are
provided by Bloomberg terminal. The data being examined is derived using
log-normal and descriptive statistic to understand how the data is distributed
during the time period it was taken. Simple population standard deviation is
used on both data. Covariance and correlation coefficient is used to compare
JCI and BINDO price movement.
Empirical Result & Analysis
The log-normal descriptive statistic
shows the basic theory of investment where if investor is willing to receive a
higher reward, hence he/she will need to accept a higher risk. Below is the
descriptive statistic of JCI and BINDO and its delta.
It is shown on figure one that the
mean and the standard deviation of JCI is larger than BINDO, in addition the
variance is also larger for JCI. In terms of normal distribution, both has
negatively skewed distribution – meaning both has long left tail, where the
median is higher than the mean. Below is the comparison between the price
deviation of the two instruments.
Figure two is showing the deviation
price of JCI and BINDO, and by finding its skewness and kurtosis, it’s shown
that the price deviation is more stable for BINDO where most of the deviation
is between -1 to 0 and 0 to 1, whereas for JCI – even though slightly higher on
0 to 1 – JCI price deviation has a longer left tail than BINDO, meaning its
price deviation is wider than BINDO, which makes perfect sense and align with
the fundamental investment theory of high
risk, high gain. After knowing its price deviation, skewness and kurtosis,
now using covariance and correlation coefficient to see whether JCI and BINDO
behave the same way or not. Below is the result from the test.
The
result from covariance test is giving a positive number, hence BINDO move in
the same direction with JCI. The result for correlation coefficient is also
positive with 0.59, this means that when JCI increase by 1%, BINDO increase by
0.59% and vice versa if JCI decreased by 1%, BINDO will decreased by 0.59%. With
a portfolio consist of 50% JCI and BINDO the average monthly return is 0.542%
with a standard deviation of 2.77% per month. Figure four is a chart showing
the price movement comparison between JCI and BINDO.
Figure
four shows that a deviation happens on January 2012 until January 2013 where
the price of JCI increased but BINDO is flat during the same period. Other than
that, the historical data is reflecting the result from the covariance and the
correlation coefficient. To conclude the relationship between JCI and BINDO, it
is the same with the conclusion on price deviation, where stocks give higher
return and bonds give slightly lower return and both are positively correlated.
So far, the relationship between
stocks and bonds are still align with the fundamental of investment theory of high risk, high gain. On the next test,
the test will create an efficient
frontier [3] and this test will give an interesting
result on the relationship between the composition of stocks and bonds and its
relationship on risk and return. Figure five is showing the efficient frontier
of JCI and BINDO.
For future
study, volume and market size of Indonesian bond and stock market will need to
be extracted and compared with their price movement, and lastly comparing it
with any event, news or other important or seasonal trade that happen during
the period.Figure 5
Each
black dot shows of portfolios’ return and risk, and as the XY-axis is getting
higher, the proportion of JCI in the portfolio increase by 0.05%, where the
lowest XY-axis shows a portfolio consist of 100% BINDO and the highest XY-axis
consist of 100% JCI. According to the efficient
frontier theory, investor may choose any portfolio along the efficient frontier line (all efficient
portfolios), but the green dot with an X label is a global minimum – variance portfolio, meaning the X portfolio which
consist of 25% JCI and 75% BINDO give the lowest risk or standard deviation,
and if investor choose portfolio outside of the efficient frontier line (red dots) – is considered to be
inefficient portfolios.
An
interesting finding on this research is how dynamic the Indonesian capital
market is, and it is shown by the difference between the monthly return and the
difference of the standard deviation.
As
shown on figure six, the difference between JCI return and BINDO return is only
0.10% per month, whereas the difference on standard deviation is almost 1% per
month – 0.88% to be exact. Annually, the difference on return is 1.22% and
standard deviation is 10.53%. Assuming a rational investor, will not want to
put 100% investment in the stock market because the amount of risk that it
gives does not compensate the amount of return it gives.
The
finding on this research will need an additional test whether it is an anomaly
or does the capital market in Indonesia is very dynamic? Looking at the price
movement, dynamic can be the answer, but it will bias without considering its
volume, market size and events/news (anomaly) that occurred during the period.
Conclusion
In the last 5 years and 8 months, the
fundamental theory of investment is applicable in the Indonesian capital market
where investor that are willing to take higher risk, will receive higher
return/gain in their investment. The covariance between the bond market and
stock market in Indonesia is positive and with a correlation coefficient of
0.59, hence both market move in the same direction with positive correlation of
0.59 on bond market. Regarding efficient portfolio, the efficient portfolio
with the lowest risk is by allocating 75% bonds and 25% stocks in the
Indonesian capital market during the period.
Interestingly, the result between JCI and BINDO
return and risk is not showing an attractive return compared to its risk. The
difference of the monthly return is 0.10% but investor must accept 0.88% of
higher risk if they put 100% of their portfolio in stock market. All in all,
the finding is bias because it does not account for the volume, market size and
event/news/anomaly that happen during the period, hence further study will need
to be done to answer whether the Indonesian capital market is dynamic or is it
just an anomaly during the specific time period.
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