Accuracy of Single- and Multi-Index Models in Stock Investment Portfolios: Study on LQ45 Shares after the Covid-19 Pandemic in Indonesia

Sunarto, Ali Ma’sum, Kasmari, Bambang Sudiyatno

Abstract

This study discusses the problem of the accuracy of the single- and multi-index models to form a stock investment portfolio. This study aims to reveal information related to the accuracy of the single- and multi-index models to form an optimal stock investment portfolio after the COVID-19 pandemic in Indonesia. The results of the analysis can be used to choose which model is more accurate to form an optimal stock portfolio that can provide returns for investors. This research is devoted to determining the optimal stock portfolio using the single- and multi-index models. The data were collected from stocks included in the LQ45 list for February-July 2022 with 5980 observations consisting of 115 market returns, 1150 industrial sector returns, and 4715 individual stock returns. The analytical method used was regression analysis to predict the expected returns from single- and multi-index models, standard deviation of residuals, and Wilcoxon's differential signed-rank test. The results of the study show that stock investment portfolios based on daily data using the single index model approach and the multi-index model have their respective levels of accuracy with an accuracy rate of 95% (alpha 5%). The main finding is that the multi-index model proved to be more accurate than the single-index model, where the standard deviations of the multi- and single-index models were 0.0215 and 0.0280, respectively.

 

Keywords: individual stock returns, market returns, multi-index model, single-index model, Wilcoxon’s signed-rank test.

 

DOI: https://doi.org/10.55463/hkjss.issn.1021-3619.61.64


Full Text:

PDF


References


CHEN, Z., LI, H., LI, Z., & YIN, L. (2022). Analysis of Ten Stock Portfolios Using Markowitz and Single Index Models. Proceedings of the 7th International Conference on Social Sciences and Economic Development, 652, 1219–1225.

ELTON, E.J., GRUBER, M.J., BROWN, S.J., & GOETZMANN, W.N. (2014). Modern portfolio theory and investment analysis. 9th ed. Hoboken, New Jersey: John Wiley & Sons.

FARRELL, J.L. (1976). The multi-index model and practical portfolio analysis. Charlottesville, Virginia: The Financial Analysts Research Foundation.

FERNANDEZ, M., & KUMAR, B.R. (2020). Examination of index model and prediction of beta – A case study examination in IT sector. International Journal of Economics and Management Systems, 5, 158-161. http://dx.doi.org/10.5430/afr.v8n2p226

GUJARATI, D.N., & PORTER, D.C. (2009). Basic econometrics. 5th ed. New York: McGraw-Hill.

HU, B., & LI, J. (2022). Comparison of the Markowitz and single index model in optimal portfolio. Proceedings of the 2nd International Conference on Management Science and Industrial Economy Development, 312-319.

JING, D., IMENI, M., EDALATPANAH, S.A., ALBURAIKAN, A., & KHLIFA, H.A.E.W. (2023). Optimal selection of stock portfolios using multi-criteria decision-making methods. Mathematics, 11(2), 415. https://doi.org/10.3390/math11020415

JOSHI, H.S. (2015). Practical application of modern portfolio theory in context to asset allocation by investing in negatively correlated assets reduces your risk. International Journal of Research in Humanities & Social Sciences, 3(2), 1-6.

KING, B. (1966). Market and industry factors in stock price behavior. Journal of Business, 39(1), 139–190. https://doi.org/10.1086/294847

LESTARI, N.P. (2021). Simulation of optimal portfolio using single index model and Markowitz model on Lq-45 Index Shares for 2018. Jurnal Bisnis, Manajemen dan Perbankan, 7(1), 93-140. https://doi.org/10.21070/jbmp.v7i1.880

MARKOWITZ, H. (1952). Portfolio selection. The Journal of. Finance, 7(1), 77–91. https://doi.org/10.2307/2975974

MISHRA, R.K., & ACHARYA, S.C. (2015). Optimal portfolio construction in banking and pharmaceuticals sectors in India: An empirical study. Srusti Management Review, 8(2), 6-11. Retrieved from https://srustimanagementreview.ac.in/paper_detail.php?id=MjQy

NALINI, R. (2014). Optimal portfolio construction using Sharpe’s single index model – A study of selected stocks from BSE. International Journal of Advanced Research in Management and Social Science, 3(12), 72-93. Retrieved from https://indianjournals.com/ijor.aspx?target=ijor:ijarmss&volume=3&issue=12&article=007

PENADÉS-PLÀ, V., GARCÍA-SEGURA, T., MARTÍ, J.V., & YEPES, V. (2016). A review of multi-criteria decision-making methods applied to the sustainable bridge design. Sustainability, 8(12), 1295. https://doi.org/10.3390/su8121295

PUTRA, I.K.A.S., & DANA, I.M. (2020). Study of optimal portfolio performance comparison: Single index model and Markowitz model on LQ45 stocks in Indonesia Stock Exchange. American Journal of Humanities and Social Sciences Research, 4(12), 237-244. Retrieved from https://www.ajhssr.com/wp-content/uploads/2020/12/ZE20412237244.pdf

QUR'ANITASARI, Q., NUZULA, N.F., & DARMAWAN, A. (2019). Critical analysis of Sharpe, Treynor and Jensen methods in analyzing stock portfolio performance LQ-45 stock studies. Asia-Pacific Management and Business Application, 8(2), 89-104. https://doi.org/10.21776/ub.apmba.2019.008.02.2

ROY, S. (2016). Multi-index conditional investment performance measure: An empirical analysis. International Journal of Financial Management, 6(3), 14-31. Retrieved from https://www-i-scholar-in.dplt.remotlog.com/index.php/ijfm/article/view/113225

SANGEETHA, S., MADANE, K., & MURALIDARAN, J. (2021). Building an efficient portfolio using Sharpe’s single index model (An empirical study with reference to Nifty 50). Asia-Pacific Journal Management and Technology, 2(2), 11-21. https://doi.org/10.46977/apjmt.2021v02i02.002

SARAVANAN, A., & NATARAJAN, P. (2012). Optimal portfolio construction with Nifty stocks (An analytical prescription for investors). Advances in Management, 5(8), 47-53. Retrieved from https://ssrn.com/abstract=3144198

SHARPE, W.F. (1963). A simplified model for portfolio analysis. Management Science, 9(2), 277-293. https://doi.org/10.1287/MNSC.9.2.277

SHOLEHAH, N.A., PERMADHY, Y.T., & YETTY, F. (2020). The Comparison of Optimal Portfolio Formation Analysis with Single Index Model and Capital Asset Pricing Model in Making Investment Decision. European Journal of Business and Management Research, 5(4), 1–9. http://dx.doi.org/10.24018/ejbmr.2020.5.4.470

SOROURKHAH, A., & EDALATPANAH, S.A. (2022). Using a combination of matrix approach to robustness analysis (MARA) and fuzzy DEMATEL-based ANP (FDANP) to choose the best decision. International Journal of Mathematical, Engineering and Management Sciences, 7(1), 68-80. http://dx.doi.org/10.33889/IJMEMS.2022.7.1.005


Refbacks

  • There are currently no refbacks.