OPEN UNIVERSITY HO CHI MINH CITY UNIVERSITEÙ LIBRE DE BRUXELLES SOLVAY BUSINESS SCHOOL MMVCFB 6 VIETNAM – BELGIUM MASTER IN MANAGEMENT PROGRAM NGUYEN TRUONG SON DEVELOPING A TOOL FOR PORTFOLIO SELECTION MASTER IN MANAGEMENT THESIS Thesis Tutor: Dr. VO THI QUY HO CHI MINH CITY 2007 Developing a Tool for portfolio selection i COMMITMENT I commit that this is my own research. All figures and results stated in this thesis are true. NGUYEN TRUONG SON Developing a Tool for portfolio selection ii ABSTRACT The history of development of stock markets in the world has witnessed many financial bubble phenomena. The relentless rises and sudden falls of stock prices in Ho Chi Minh City Stock Exchange Center (HSEC) during the last 6 years indicated that the Stock Market of Vietnam has not been a mirror to reflect the economy's health. The sudden fluctuation of the stock price have no relations to the performance of the companies listed in the stock exchange centers although all of which have had positive production and business results. The stock value keeps on fluctuating, but what's about the investors? Almost investors have an inadequate understanding of the stock market and lack of professional knowledge as well as necessary information related to the market. Most of them just follow short-run investments as speculators or gamblers. Stock valuation and analysis are controversial issues with various schools, various viewpoints and models. In case of the new Ho Chi Minh City Stock Exchange Center (HSEC), there are lots of distortions in stock valuation in emerging markets, therefore the method for stock analysis and valuation applicable for this market is only the first step towards a rational investing decision-making in long term. However, stock analysis is always one of premises of stable developments of any stock market. Having recognized all of these aspects, this research study is conducted as an explorative study of the applicability of relatively appropriate models for stock valuation under current conditions of the Ho Chi Minh City Stock Exchange Center (HSEC). These models are based on the portfolio theory; a theory has been proved and generally accepted in the world in the decades of the last century as well as in the recent years. Developing a Tool for portfolio selection iii We hope that this study will provide the securities investors a quick and useful analysis tools, to help the investors in valuation of the commodities available in the stock market and to prepare by themselves an effective portfolio as per their own willing. Developing a Tool for portfolio selection iv ACKNOWLEDGEMENT I would like to express my deepest gratitude to my tutor, PhD. Vo thi Quy, for her invaluable guidance, continuous advice, encouragement, and constant support throughout this thesis. Great appreciation is also to opponents, who have given constructive comments, helpful suggestions to this thesis. Grateful thanks are conveyed to the rest of the thesis committees for the useful comments and extensive support. And, great thanks are also conveyed to the founders of this study program, Prof. Tran Anh Tuan and Prof. Michel Ale’ who create opportunity for me to study this useful program as well as all professors and coordinators of this study program. Finally, I would like to thank you to my family and friends for their support and great inspiration which encouraged me to pursue this study successfully. Developing a Tool for portfolio selection v TABLE OF CONTENTS COMMITMENT i ABSTRACT ii ACKNOWLEDGEMENT iv 1. INTRODUCTION 1 1.1. Rationale 1 1.1.1. Background of Forming Stock Market. 1 1.1.2. Justification 1 1.1.3 Rationale of the Study 3 1.2. Introduction of Research Study 4 1.3. Purpose of the study 5 1.4. Research Objectives and Scope 6 1.4.1. Objectives 6 1.4.2. Scope of the Study 6 1.5. Research Methodology: 6 1.6. Arrangement of Research 8 2. LITERATURE REVIEW 9 2.1. History of portfolio theory 9 2.2. Introduction of portfolio theory 12 2.2.1. Mean – Variance of Assets and Portfolio 12 2.2.2. Optimal Portfolio of N Risky Assets 17 2.2.2.1. The Method of Lagrange Multipliers 18 2.2.2.2. Optimal portfolios of N.risky assets 19 2.2.3. Optimal portfolios of n.risky assets + 01 Risk-free asset 26 2.2.4. Some special constrains effect to Portfolios 32 3. TOOL FOR PORFOLIO ANALYSIS 35 Developing a Tool for portfolio selection vi 3.1. Tool Overview 35 3.2. Structure of the tool 36 3.2.1. Block of reading raw data and outputting primary data to the screen 37 3.2.2. Block User-Interface 37 3.2.3. Block of processing data inputted by user 39 3.2.4. Block of outputting reports 46 3.3. User Manual 46 3.3.1. Installing Tool 46 3.3.2. List of all stocks in the Market and their indexes 48 3.3.3 Optimal portfolio of N Risky assets 56 3.3.4 Optimal portfolios of N Risky Assets and a Risk-Free asset 63 4. TESTING TOOL BY EXCEL MODEL 68 4.1. Calculating on Prof. Hugues Pirotte’s excel model 68 4.2. Calculating on Tool 72 4.3. Comparing the results given by Tool and Excel model 74 5. CONCLUSION AND RECOMMENDATIONS 75 5.1. Conclusions 75 5.1.1. Effectiveness of the tool 75 5.1.2. Limitations of the tool 75 5.2. Needs for further study 76 References v APPENDIX 01 vi Developing a Tool for portfolio selection 1 1. INTRODUCTION 1.1. Rationale 1.1.1. Background of Forming Stock Market. Since 1986, Vietnam has embarked in a comprehensive renovation to transfer its economy from an administrative-centralized to a market socialist-oriented one. Then, from a stagnant status, Vietnam has achieved considerable achievements after 20 years of implementation of renovation policy. However, as one of critical issues in Vietnam economy, the national financial system has shown many weaknesses in terms of its institutions as well as the financial market. Savings have not transferred fully into investment even though savings rate is still very low, only about 17% of GDP. The equitization of state-owned enterprises is slow. The lack of capital and being unable to borrow loans are very common for the medium and small enterprises. In these circumstances, after six years of preparation, the first stock exchange floor of Vietnam, namely "HochiMinh City Stock Exchange Center" was officially opened in the HochiMinh City on July 20 th , 2000 and its first trading session was on July 27 th , 2000. 1.1.2. Justification From the original small scale with only two listed companies with the total charter capital of about 270 Billion VND, up to 29/12/2006, Stock Market of Vietnam has 106 categories of listed stocks and 02 Fund Certificate (VF1 & PRUBVF1). The number of these bonds is increasing daily. At present time, total number of listed stocks is 1.406 Million stocks, with total trading value is about VND 32,307 Billion, there are more than 100,000 investors' Developing a Tool for portfolio selection 2 accounts, where 246 investors are entities, more than 362 investors are the foreigners. Table 1: Several particulars of HochiMinh City Stock Exchange Center by years Unit: Billion VND Year 2000 2001 2002 2003 2004 2005 Dec 29 th , 2006 Total Market Capitalization Value 986 570 2,436 2,307 4,237 7,390 14,061 Total Trading Value 92 1,033 1,087 2,998 19,887 26,878 32,307 Sources: State Securities Commission Through there are achievements as stated above, however the Stock Market of Vietnam has shown limitations, difficulties, challenges as follows: - The scale of the stock market is still very small in respect of supply as well as demand; stock commodities on the stock market are small in number and are poor in categories. At present time, the commodities are mainly stocks, bonds and only two Investment Fund Certificates (VF1 & PRUBVF1). The Government bond market is monotonous with a simple issue method, the secondary transactions are not yet developed and are very primary. - Number of the listed companies having healthy financial status is very modest, the competitiveness in the market, especially the overseas market, of the commodities of those companies are very limited. The market has not yet attracted the active participation of the joint stock companies. As of Dec 29th, 2006, there are only 106 joint stock Developing a Tool for portfolio selection 3 companies of 5000 joint stock companies participate in the stock markets. It is a very small number in comparison with the capability of the economy and of the investors. - The securities activities are mainly short term speculation, without analysis and forecasting in the Stock Market of Vietnam, the public keeps on following psychological factors and are influenced by feeling. Very few professional investors are investing by analysis of indexes; data of the company, this factor affects the stable development of the Stock Market. Moreover, the accuracy of the information provided by the stock market participants is not high causing difficulties for the investors in making reasonable decision. The listed entities are not fully aware of the importance of the disclosure of information. Therefore, they are not active, self-conscious in providing information to the public affecting the decision of the Investors on participation in the market. 1.1.3 Rationale of the Study With the above advantages and defects, though the present stock market of Vietnam is still an emergent market with a relative small scale but is development speed as will as potentiality is very large and very promising in future. Therefore, many efforts for development and perfection of the market are required from the authorities as well as from the participant of the market. And one of the most important issue for development of the stock market is to equip with knowledge on securities analysis and valuation for the investors to identify the market conditions, quality of the commodities (stocks, bonds, ), basing on that basis to make a proper investment decision contributing in the healthy and effective development of financial market, creating more confidences for other potential investors. In Vietnam, the tools as well as [...].. .Developing a Tool for portfolio selection securities valuation and analysis software are very rare, and if available all of them are overseas software which is distributed limitedly and their prices are also not in compliance with the purchasing capability of the individual investors and sometime they are a burden of investors being entities Therefore, having a simple, cheap and effective... domestic and foreign authors Data for the research and calculation are mainly the secondary data obtained from the Internet, website of Ho Chi Minh City Stock Exchange Center (HSEC) and the securities brokering companies To develop software basing on database of Access and two soft wares: MATLAB and Visual Basic 6.0 The most important work is to develop the functions for calculation of portfolio and optimization... software This model has been publicly accredited because of its popular, practical and easy application in portfolio management Today, this model is a broad theory for portfolio selection applicable for diversification and spreading of securities (for example: bonds, stocks on real estates) while Matkowitz’s primary model is applied for distribution of common stocks Before the introduction of the portfolio. .. Hubbert, and Investments by Bodie, Kane, and Marcus 2.2.1 Mean – Variance of Assets and Portfolio We shall concern ourselves with primarily two basic features of an asset The first is the average return of an asset over a period of time The second characteristic is how risky it is to obtain similar returns comparable to the average over the investment period For an asset with value S(0) at time 0 and value... However, for any other frontier portfolio a it can be shown that there exists a portfolio z (a) having zero covariance: cov( (a) p , z (a) p ) (56) 0 This is given by solving: cov( (a) p , z (a) p ) C D a p A C z (a) p A C 1 C 1 C 0 (57) We have: z (a) p A C D/C2 ( (pa ) A / C ) 25 (58) Developing a Tool for portfolio selection 2.2.3 Optimal portfolios of n.risky assets + 01 Risk-free asset We shall now... notes we shall discuss a quantitative approach to constructing portfolios In particular, we shall use the methods of constrained optimization to construct portfolios for a given collection of assets with desirable features as quantities by an appropriate utility function and constraints The materials presented here are taken from the following sources: Theory of Finance - Mean Variance Analysis by Simon... basing on portfolio theory This tool is capable to analyze the data of Ho Chi Minh City Stock Exchange Center (HSEC) and other stock markets to illustrate the calculation method 1.5 Research Methodology: This research is based on the following main steps: 6 Developing a Tool for portfolio selection Framework Analysis Problem definition Literature review Selection of framework Developing Tool for portfolio. .. A portfolio is an investment made in n assets using some amount of wealth W Let Wi denote the amount of money invested in the ith asset We shall allow negative values of Wi, which for example can be interpreted as short selling an asset In other words, we assume a liability and must deliver the asset at a future time Since the total wealth invested is W we have: 14 Developing a Tool for portfolio selection. .. own portfolios 9 Developing a Tool for portfolio selection on their securities pricing?” To solve the problem, Sharpe (1964), Lintner (1965) and Mossin (1966) introduced the “Capital Assets Pricing Model” (CAPM) This model was considered as a unique analysis tool for portfolio management in nearly 15 years Besides this model appeared on basic financial text books, it has a broad introduction and application... collection of assets an investment with desirable features A variety of different asset characteristics can be taken into consideration, such as the amount of value, on average, an asset returns on over a period of time and the riskiness of reaping returns comparable to the average The financial objectives of the investor and tolerance of risk determine what types of portfolios are to be considered desirable . In Vietnam, the tools as well as Developing a Tool for portfolio selection 4 securities valuation and analysis software are very rare, and if available all of them are overseas software which. develop an accurate, quick, easy-to-use calculation tool for valuation and selection of effective securities portfolios basing on portfolio theory. This tool is capable to analyze the data of. fluctuating, but what's about the investors? Almost investors have an inadequate understanding of the stock market and lack of professional knowledge as well as necessary information related