practice applying efficient frontier in IHSG

4 month ago my lecture give group project to us the student, she said “let’s act you are fund manager, I will give 10 billion rupiah please invest this fund in IHSG (capital market), you are free decide the strategy after 3 month please report me the result and the reason!” .. the investment time it’s from 24 July until 22 October 2012

There’s a lot of idea come into my head for this project, but nothing i really sure. I was thinking about peter lynch PEG, Joel Greenblatt strategy, 3 factors models, until eventually I’m thinking about efficient frontier from Harry markowitz, moreover Markowitz theory is must learn subject in any book related with invesment, so i think why not? It’s the right time to applicate the theory.. after completing all the the theories and the data i need, i start this project..

First I choose 16 stock that represent every sector in Indeks Harga Saham Indonesia (IHSG) randomly, I consider from the liquidity and the performance..after that I collect the open close data in last 50 month.. from the data i calculate  holding period return for 50 sample ( monthly)

Holding period return = ( close – begin + deviden/ begin ) , consider we invest in short time so we exclude deviden

Second step are to find  standards deviation, variance, covariance, correlation,average mean using excel to support the calculation.. based on the calculation result author try to reduce the stock shortlist from 16 become most consideration is looking for the lowest covariance.

Third this section author begin to applicate the efficient frontier strategy..

There is possibility return from the range of the 4 stock average mean return in last 50 month.. from this range I choose 2,5% return monthly.. in 2,5% expected return there are many possibilities to construct the weighted portfolio.. author construct the portfolio with the lowest risk which mean choosing the minimum portfolio variance.. for example let’s see the graph above, for investment E and C expected return are the same 2,5% but investment E contain smaller risk.. fluctuation movement ( variance ) we categorized as risk.. by the way i include government bond as one of my investment tools, cause from Markowitz theories the investment must be combine between risk asset & risk free asset.

The basic formula to build the matrix above to find portfolio variance ..

From this process author get the weighted with minimum portfolio variance.. Finally the result after author investing in capital market for 3 month are..

From the result my portfolio increase far more than IHSG or LQ45 (like mimicing the index) in three month period time..even though this strategy proving make my portfolio perform superior but  i will not easily conclude the efficient frontier strategy as my magic stick in the future when invest in capital market, i believe there is luck take part in here when i do stock picking, and also the sample is too small.. the good point is finally i already applicate the strategy in virtual market, the result is extraordinary beating index but the most important thing is there’s a lot of things i learn.

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