Contents

Contents................................................................................................................ 1 1.0 INTRODUCTION............................................................................................... 3 2.0 Brief Reviews of Stocks and Malaysia Economics...........................................5 2.1 Top Glove Corporation Berhad......................................................................5 2.2 Sapura Resources Berhad............................................................................5 2.3 KSL Holdings................................................................................................ 6 2.4 Lafarge Malayan Cement..............................................................................6 2.6 Scomi Group................................................................................................. 8 2.7 Cyber Towers Berhad .................................................................................. 8 2.8 Leader Steel Holding.................................................................................... 9 2.9 Ahmad Zaki Resources Berhad....................................................................9 2.10 MK Land Holdings..................................................................................... 10 2.11 Freight Management Holdings Berhad......................................................11 2.12 FACB Industries Incorporation..................................................................11 2.13 Berjaya Group........................................................................................... 12 2.14 MHC Plantation Berhad ...........................................................................12 2.15 Perstima Berhad...................................................................................... 13 2.16 Malaysia Economic................................................................................... 14 3.0 METHODOLOGY............................................................................................. 15 3.1 Stocks Return............................................................................................ 15 3.1.1 Nominal Return..................................................................15 3.1.2 Log Nominal Return ...........................................................15 3.1.3 Average Return..................................................................15 3.1.4 Annual Return....................................................................15 3.2 Stand Alone Risk......................................................................................... 16 3.2.1 Excess Return.....................................................................16 3.2.2 Variance.............................................................................16 3.2.3 Standard Deviation.............................................................16 1

3.3 The relationship between the stock and the market..................................17 3.3.1 Covariance.........................................................................17 3.3.2 Correlation Coefficient........................................................18 3.3.3 Beta ..................................................................................18 3.3.4 Covariance Matrix...............................................................18 3.4 Portfolios Risk and Return..........................................................................20 3.4.1 Portfolio Variance...............................................................20 3.5 Plotting the efficient frontier.......................................................................20 4.0 INTERPRETATION OF RESULTS.......................................................................21 4.1 Average Weekly Return..............................................................................21 4.2 Average Annual Return...............................................................................23 4.3 Variance..................................................................................................... 25 4.4 Standard Deviation..................................................................................... 26 4.5 Correlation of Coefficient Matrix.................................................................28 4.5.1 Covariance.........................................................................28 4.5.2 Correlation ........................................................................29 4.6 Beta............................................................................................................ 30 4.7 Portfolio Standard Deviation (When Short Selling was disallowed).............31 4.8 Efficient Frontier (When Short Selling was allowed)...................................33 4.9 Portfolio Standard Deviation (When Short Selling was allowed).................35 4.10 Efficient Frontier (When Short Selling was allowed).................................38 5.0 CONCLUSION................................................................................................. 39

1.0 INTRODUCTION The objective of this working paper is to construct an efficient portfolio that consists of 15 actively trading stocks listed on Bursa Saham Malaysia or formerly known as Kuala Lumpur Stock Exchange (KLSE). In general, total risks include systematic risks and unsystematic risks. Unsystematic risk is risk that can be eliminated through diversification because this kind of risk is unique only to a specific firm. On the other hand, systematic risk is risk that cannot be eliminated through diversification because it has market-wide effect and affect the entire market. Unsystematic risk can be eliminated by investing our capital in a group of assets. A portfolio which consists of a group of assets can be used as a way to eliminate the unsystematic risk. The range of return of a portfolio is in between the lowest possible stock return of an individual stock in the portfolio to the highest possible stock return of an individual stock in the portfolio. That is, the portfolio return is the weighted average return of each individual stock as included in the portfolio. Portfolios risk is reduced when assets in the portfolio are negatively correlated with each other. An efficient portfolio is a portfolio that provides the highest return for a given level of risk. Efficient frontier is a set of efficient portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios on the efficient frontier are those that provide the best trade off between risk and return. Therefore, every investor should target on portfolios that lie on the efficient frontier. Therefore, asset allocation is the key of constructing an efficient portfolio. Asset allocation is a scheme that involves dividing ones portfolio into various asset classes to preserve capital by protecting against negative developments while taking advantage of positive ones. In view that the assets on hold in our portfolio are stocks, therefore, the asset allocation involves the process of spreading our investment capital across different industries within Malaysia. As an aforementioned, the objective of this working paper is to construct an efficient portfolio that consists of 15 stocks listed on KLSE. More specifically, the aim of this working paper is to determine the best allocation of individual stocks within a portfolio that yields a maximum portfolio return with the minimum portfolio risk. In order to obtain the minimum variance portfolio, we will need to perform portfolio optimization. To do so, we must first apply mean-variance analysis by analyzing each individual stocks return (mean) and standalone risk (standard deviation) and the relationship between the individual stock return with the market return (beta). Lastly, we vary the weights of each individual stock within a
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portfolio in order to construct an efficient portfolio that yields the highest return with the lowest risks. The efficient frontier is plotted at the end in order to prove that the portfolio optimization process is a success. The end result may also help investors to select a portfolio that lies on the efficient frontier for investment purposes. However, the selection of efficient portfolios on the efficient frontier depends on investors risk and return preferences. Our group had picked 15 stocks listed on Bursa Saham Malaysia at random industries. There are Top Glove Corporation, Sapura Resources Berhad, KSL Holdings, Lafarge Malayan Cement, Pharmaniaga Berhad, Scomi Group Berhad, Cyber Towers Berhad, Leader Steel Holdings, Ahmad Zaki Resources Berhad, MK Land Holdings, Freight Management, FACB Industries Incorporation, Berjaya Group, MHC Plantation Berhad and Perstima Berhad.

2.0 Brief Reviews of Stocks and Malaysia Economics 2.1 Top Glove Corporation Berhad The Top Glove Corporation was establish in 1991 with only one and about three production lines, then the Top Glove Corporation has growth continuously and bound to become the worlds largest rubber glove manufacturer. Top Glove was cooperating with the government agencies and ministries in order to stay ahead with the shape of product development and stay keep to get the information of the latest development in rubber research technology. Now it was known as the one stop Centre offering an extensive and complete high range of high quality, high value added and cost-effective rubber gloves. The company was first listed in bursa Malaysia and Bursa Saham Kuala Lumpuron 27 March 2001. With the short period, The Top Glove Corporation was promoted from the Second Board to the Main Board Market of Kuala Lumpur Stock Exchange on 16 May 2002. It has the shareholder value of RM 1.28 billion with annual turnover of about 2.31 billion as at financial year ended 31 August 2012. It also listed as one of the component stocks of FTSE Bursa Malaysia (FBM) Mid 70 Index, FBM Top 100 Index and FBM EmasIndex with a market capitalization of RM3.67 billion as at 9 April 2013.The company also has developed an expansion of its capacity. Its manufacturing facilities have spread over Malaysia, Thailand and China has grown from 5 to 24 presently. The Top Glove has export about to 1800 customers in over 185 countries. 2.2 Sapura Resources Berhad With over than 3 decades, the Sapura Group has leaded the acquisition and development of competitive technologies. It was established in Malaysia in 1975 and it was owned by Malaysian-owned-technology-based organization. The beginning of the business started as telecommunication infrastructure and services provider and the company has expanded and diversified it business into four majors area which are oil and gas, secured technology, industrial and automotive manufacturing, and knowledge and education. For the history of Sapura Resources Berhad, the business is covered by fundamental belief in intergrade people with the technology. Sapura Resource give an effort to built capacity of the home-grown skilled man power and aggressive investment in development and research, which put the company position to the globally competitive. The company had produced the high quality, specialized and multi-skilled pool of technology expertise. Nowadays, Sapura Resource had expanded its capabilities and competencies that cover the full lifecycle of product and systems.

2.3 KSL Holdings KSL Groups property development has the periods performance with over than twenty year, successfully strive itself to establish as the fastest growing property developer in building modern style and affordable residential and commercial properties in the state of Johor Bahru. KSL Group has involved in investment holding and provision of management services to subsidiaries. With the companys subsidiaries proceed with the property development, property management and property investment. The businesss scope is operate in four major segment which are, property development which is engaged in management apartment, property investment which engaged in investment in real properties, and investment holding which mean the provision of management services to the subsidiaries. In February 2002, KSL Holding Berhad had successfully listed on the main-board of Bursa Malaysia and its group of companies has been growing rapidly and stably over these years. However the Group also cant escape from two recession since its inception, it has successfully maintained its profitability based on its competitive advantage of being reputable developer, competitive pricing without compromising on safety and quality, strategic land banks, quality control and its contemporary concept and design. The company has housing projects in Johor Bahru consist of Taman Nusa Bestari 2, Taman Nusa Bestaru, Taman Bestari Indah, and Taman Kempas Indah. 2.4 Lafarge Malayan Cement Lafarge Malayan Cement (LMC) is the leader in the Malaysian construction materials industry. Incorporated in 1950, its first cement plant was built in Rawang in 1953. LMC is today the parent of a group of companies in Malaysia and Singapore whose core businesses are in the manufacturing and sale of cement, ready-mixed concrete and other related building materials. In the Cement business, LMC currently employs more than 1,150 people and operates a nationwide network of facilities, which includes three integrated cement plants in Langkawi, Kedah; Kanthan, Perak and Rawang, Selangor, a grinding plant in Pasir Gudang, Johor with distribution channels by road, rail and sea. It employs about 90 people in its Aggregates business and operates five quarries in Malaysia. A world leader in building materials, Lafarge employs 65,000 people in 64 countries, and posted sales of 15.8 billion in 2012. As a top-ranking player in its Cement, Aggregates and Concrete businesses, it contributes to the construction of cities around the world, through its innovative solutions providing them with more housing and making them more compact, more durable, more beautiful, and better connected. With the worlds leading building materials research facility, Lafarge places innovation at the heart of its priorities in order to
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contribute to more sustainable construction and to better serve architectural creativity. Since 2010, the Lafarge Group has been part of the Dow Jones Sustainability World Index, the first global sustainability benchmark in recognition of its sustainable development actions. 2.5 Pharmaniaga Berhad Pharmaniaga Berhad is the largest integrated local healthcare company in Malaysia. Pharmaniaga's principal activities in manufacturing of generic pharmaceuticals, logistics and distribution, sales and marketing, supply of medical products & services and hospital equipping. The essence of Pharmaniaga is the seamless amalgamation of these key disciplines, represented by an entirely integrated group of companies, processes and people that uphold commitment to deliver quality products and services at all times. The concession to privatise the Government Medical Store was novated to Remedi Pharmaceutical Sdn Bhd which started operations on 1 December 1994 with a paid up capital of RM 20 million. In 1999, Pharmaniaga Berhad made its debut on the Second Board of the Kuala Lumpur Stock Exchange. During 2002, the company completed the corporate rebranding exercise where all companies within the Pharmaniaga Group were renamed to carry the singular Pharmaniaga identity. Raza Pharmaceuticals (Bangi) and Strand Pharmaceuticals (M) Sdn Bhd was then renamed to Pharmaniag Manufacturing Bhd and Pharmaniaga LifeScience Sdn Bhd (Puchong). Next year, migration of Pharmaniaga from the Second Board to the Main Board of the Bursa with increased paid up capital of RM100 million from RM50 million previously via the issuance of bonus shares to shareholders. Pharmaniaga secured a 10 year concession agreement with the Health Ministry to supply medical products to Government-owned hospitals beginning December 2009. The group through its subsidiary, PT Millennium Pharmacon International Tbk (MPI), distributes and trades pharmaceuticals, foods supplements and diagnostic products in Indonesia.

2.6 Scomi Group Scomi Group Bhd (Scomi), a global service provider mainly in the oil and gas industry, is a company listed on the Main Market of Bursa Malaysia. Other public listed companies within Scomi Group are Scomi Engineering Bhd and Scomi Energy Services Bhd (formerly known as Scomi Marine Bhd) which are listed on Bursa Malaysia, and PT Rig Tenders which is listed on Jakarta Stock Exchange. Scomi Engineering, a subsidiary of Scomi Group, is the regional leader in Logistics Engineering. Committed to providing world-class services that are second-to-none; our state-of-the-art equipment, facilities, advanced technology and proven processes are backed by skilled and experienced industry professionals, with in-depth knowledge both locally and internationally. Scomis subsidiary and associate companies are involved in the following wide range of activities worldwide. There are energy services is primarily involved in the provision of highperformance drilling solutions and related engineering services, state of the art drilling waste management equipment and solutions, high quality multi drilling services, a varied range of offshore support vessels, top of the class production enhancement chemicals. Second, transport solutions are focused on the manufacturing and design of monorail systems, buses, special purpose vehicles, rail wagons and defence vehicle solutions. Third, energy logistics is divided into the marine logistics business and offshore support in the oil and gas industries. Its marine logistics business focuses on coal transportation. Scomi Group has been spearheading expansion in the emerging markets of Brazil, India, Gulf States and China. Through its new company Scomi International Pte. Ltd., the Group is accelerating its continued growth as a one of three world-leading manufacturers of innovative transportation solutions especially in monorail systems. 2.7 Cyber Towers Berhad The principal activities of CYBERT are to carry on the business of developing and operating an internet based automatic vehicle locating system using satellite and wireless telecommunication solutions. CYBERT is involved in the development and operation of an Internet-based automated vehicle locating system called Cyber Track. This system uses global positioning system satellite, ORBCOMM satellite, and global system for mobile communication, Internet digital mapping, and geographic information system. According to the consolidated non-Audited financial statement for the first three cumulated quarters of 2012, total net operating revenues increased with 268.34%, from MYR 2,723
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thousands to MYR 10,030 thousands. Operating Results increased from MYR -36 thousands to MYR 2,239 thousands. The results of the period reached MYR 2,241 thousands at the end of the period against MYR -11 thousands last year. Return on equity (Net income/Total equity) went from -0.17% to 25.48%, the Return on Asset (Net income / Total Asset) went from -0.16% to 13.67% and the Net Profit Margin (Net Income/Net Sales) went from -0.40% to 22.34% when compared to the same period of last year. The Debt to Equity Ratio (Total Liabilities/Equity) was 86.35% compared to 5.93% of last year. Finally, the Current Ratio (Current Assets/Current Liabilities) went from 11.14 to 1.21 when compared to the previous year. 2.8 Leader Steel Holding Leader Steel Holdings Bhd, is an investment holding company listed on the Main Board of Bursa Malaysia. Leader Steel Sdn Bhd is principally involved in the manufacturing of Mild Steel Flat and Square Bars, trading of various steel products, and processing and sale of iron ores whilst Leader Steel Service Centre Sdn Bhd focused on the production of steel pipes. Both are wholly owned subsidiaries of the Group. The Groups diverse range of activities can be categorized into three main streams, i.e. Manufacturing, Trading of Steel Products and Processing and Sale of Iron Ores. Products manufactured by the Group are wide, varying from Flat Bar and Square Bar, Square Hollow Section, Rectangular Hollow Section, Furniture Tube, Oval Pipe, U Channel, and Black Pipes. Application for these products are mainly for industrial applications and used in multiple type of industries. The products are distributed to both local and export markets. Currently operating at both Penang and Sarawak plants, the rapid growth has resulted in additional needs for the Group to expand its manufacturing facilities. A new plant is being planned in Kapar, Klang and is expected to be ready for operation in the near future. 2.9 Ahmad Zaki Resources Berhad Ahmad Zaki Resources Berhad ('AZRB') was incorporated in Malaysia under the Companies Act, 1965 on 26 May 1997 as a public limited company under its present name. AZSB was incorporated as a private limited company. Since then, AZSB has successfully secured contracts from government and semi-government agencies and the private sector. These include, amongst others, Jabatan Kerja Raya Malaysia, Majlis Amanah Rakyat, Yayasan Islam Terengganu, Kuala Lumpur City Centre Berhad, KLIA, Majlis Perbadanan Petaling Jaya, University of Malaya and International Islamic University of Malaysia. With the

growth, the company upgraded its licensing status until it obtained a Class 'A' contracting license in 1993. Now AZSB has completed nearly 2 (two) Billion Ringgit worth of projects, consisting of various types of buildings and civil engineering works. With the ensuing business growth and financial performance, the group under Ahmad Zaki Resources Berhad (AZRB) was listed as a Public Limited Company on the Second Board of Kuala Lumpur Stocks Exchange in June 1999 and subsequently transfered to the Main Board on 10 September 2003. Looking to the future, the group has ventured overseas with the securing of three projects in Chennai, India and two in Riyadh, Saudi Arabia. Other activities of the group include Oil and Gas, Property Development and Plantations. 2.10 MK Land Holdings MK Land is one of the largest public listed property companies with a paid up capital of RM1.174 billion. The company is form on 1st March 1983 by Tan Sri Datuk Haji Mustafa Kamal and it involve in property, construction, commerce, landscaping, resort, agriculture, manufacturing and education. On 27 August 1999, MK Land debut on the main board of the Kuala Lumpur Stock Exchange (KLSE) with three major projects that is Taman Bunga Raya, Damansara Damai and Bukit Merah Lake Town Resort. The Group has a diversified portfolio of projects, which includes affordable housing, lifestyle living, commercial development, resort, a water theme park and property investment. The MK Land tagline is be effective, do what is right and work together. The company is quick growth because its mission is to strive towards excellence in providing quality services and products through teamwork for the betterment of the organization, society and nation. Next, MK Land get the edges top ten property developers awards on 2004, 2005 and 2006 and it also has high financial stability when has sold more than 40,000 housing units worth more than RM5 billion.

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2.11 Freight Management Holdings Berhad Freight management holdings berhad is form on 1988 is wholly Malaysian owned international freight service provider. The company is a big company which provided international freight service such as sea, rail, air freight and tuge barge service, customs brokerage and distribution container haulage and conventional trucking service. Freight Management Holdings Bhd was listed in bursa Malaysia second Board (KLSE) on 3 February 2005 and on 19th December 2007,it has transfer to the main board. Actually, the company is first Malaysia Company which listed in main board. Today, The Freight Management Group has offices located in Port Klang, KLIA, Penang, Ipoh, Malacca and Johor to cover all the important maritime and air gateways of Malaysia. Freight management holding berhad act as intermediate agent between importers/exporters and carries. This company has strong stability when has network over 107 agents in 127 countries worldwide. The service that provided by Freight management holdings berhad is airfreight service, railfreight service, tug and barge service, warehouse service andtransport and custom brokerage service. 2.12 FACB Industries Incorporation FACB Industries Incorporated Berhad (FACBII) was incorporates on 11 July 1979 in Malaysia with under name of Honco Holdings Sdn Bhd. On 18 May 1987 under name Dreamland Holdings Berhad was listed on Bursa Malaysia. On 2 November 1991, it adopted the name of Kanzen Berhad and the name of FACB Industries on 8 November 1997. FACBII is a diversified business group with steel manufacturing division as its flagship operation such as stainless and carbon steel. The Group is also involved in the trading of steel related products and manufacturing & sales of bedding products. Since 1990s, FACB Industries is largest integrated stainless steel welded pipes and butt-weld fittings manufacturers in South East Asia and had exports about 70% of its stainless steel finished products to over 60 countries by leveraging on its strong worldwide marketing network.

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2.13 Berjaya Group The history of Berjaya Corporation dates back to 1984 when the Chairman Tan Sri Dato' Seri Vincent Tan Chee Yioun acquired a major controlling stake in Berjaya Industrial Berhad originally known as Berjaya Kawat Berhad from the founders, Broken Hill Proprietary Ltd, Australia and National Iron & Steel Mills, Singapore. In October 1988, following a major restructuring, Berjaya Group Berhad then known as Inter-Pacific Industrial Group Berhad became the holding company of Berjaya Industrial Berhad. Inter-Pacific Industrial Group Berhad formerly known as Raleigh Berhad was incorporated in 1967 as a bicycle manufacturer. In 1969, the Company gained official listing on Bursa Malaysia Securities Berhad Berjaya Corporation assumed the listing status of Berjaya Group Berhad on the Main Board of Bursa Securities upon the completion of the group restructuring exercise in October 2005 and the listing of the new shares on 3 January 2006. The business includes property and construction, holiday, hotels & resorts, education, insurance, investment holdings, food & beverages and industry business. 2.14 MHC Plantation Berhad MHC was incorporated in the Federation of Malaya on 31 December 1960 under the Companies Ordinances. On 15 April 1966, under the Act, MHC assumed the name of Mah Hock Cheong Company Sdn Berhad. MHC subsequently assumed the name of MHC Plantations Sdn Berhad on 9 July 1998 and thereafter converted to a public company under its present name on 21 August 1998. MHC has been listed on the Main Market of Bursa Securities since 29 November 2000. In 2005, MHC had successfully acquired a strategic 32% stake in a plantation listed company, namely Cepatwawasan Group Berhad (CWG), based in Sandakan. CGB is listed on the Main Market of Bursa Securities. CGB is principally an investment holding company, whilst its subsidiary companies are principally involved in the cultivation of oil palm, operation of quarry, milling, sales of oil palm products and power generation and selling certified emission reduction. Presently, CWG has approximately 28,000 acres of oil palm estates in Sabah.

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2.15 Perstima Berhad Perusahaan Sadur Timah Malaysia (PERSTIMA) Berhad is the premier producer and supplier of high quality Tinplate for both domestic and export market. Established on 16th August 1979 and commenced commercial production on 2nd April 1982, it's now having a total production capacity of 200,000 MT per annum. In 2002, PERSTIMA Berhad established PERSTIMA (VIETNAM) Co. Ltd., as the first tinplate manufacturer in Vietnam, 100% owned by PERSTIMA Berhad, located in Vietnam Singapore Industrial Park (VSIP) in Binh Dong District, which started commercial production in October 2003. PERSTIMA (VIETNAM), as a manufacturer of prime grade tinplate, has been equipped with a Halogen type Continuous Electrolytic Line with a rated capacity of 100,000 MT/annum. The Company is accredited with ISO 9002 in year 1995 and now further accredited with ISO 9001:2000 in year 2001. Also in year 2005, the Company is accredited with ISO 14001. With the ISO accreditations, our Customers are assured of our highest quality on our products and services. To cater our products for all sections of society (especially Muslim communities everywhere), thier obtained HALAL certification for products to ensure confidence in consumption.

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2.16 Malaysia Economic Since it became independent in 1957, Malaysia's economic record has been one of Asia's best. Real gross domestic product (GDP) grew by an average of 6.5% per year from 1957 to 2005. Performance peaked in the early 1980s through the mid-1990s, as the economy experienced sustained rapid growth averaging almost 8% annually. High levels of foreign and domestic private investment played a significant role as the economy diversified and modernized. Once heavily dependent on primary products such as rubber and tin, Malaysia is a middle-income country with a multi-sector economy based on services and manufacturing. Malaysia is one of the world's largest exporters of semiconductor components and devices, electrical goods, solar panels, and information and communication technology (ICT) products. The Economy of Malaysia is a growing and relatively open state-oriented and newly industrialized market economy where witnessed an economic boom in the 1970s, following which it expanded to become a multi-sector economy from being a raw materials producer. Malaysia rich natural resources ensure sound developments in agriculture, forestry and mining. In 2007, Malaysia was the 3rd largest economy in South East Asia and 28th largest economy in the world by purchasing power parity with gross domestic product for 2008 of $222 billion with a growth rate of 5% to 7% since 2007. In 2010, GDP per capita (PPP) of Malaysia stands at US$14,700. In 2009, the nominal GDP was US$383.6 billion, and the nominal per capita GDP was US$8,100. Nonetheless, it is interesting to note that, the recent KLCI index was robust where as of 12 April 2012, the KLCI index closed at 1601.27, successfully breaking through the barrier of 1600. However, as of 11 May 2012, the KLCI index was closed at 1584.32, retesting the market towards the 1600 points.

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3.0 METHODOLOGY 3.1 Stocks Return 3.1.1 Nominal Return

no min alreturn, r = P 1 1 P0

3.1.2 Log Nominal Return

Logno min alreturn, R = Log (1 +r )

3.1.3 Average Return The formula for average weekly markets return ( K m ) is
Km =

260

3.1.4 Annual Return The formula used for determining the annual stocks return (Rm) is:
Rm = K m * 52

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3.2 Stand Alone Risk In general, variance is the best used measurement to measure risks or variability. Therefore, we will use variance to measure the stand alone risks for each stock. 3.2.1 Excess Return The formula to calculate excess return is
Excess Re turn = (K i Ki )

The excess return measures the difference between the stocks return in each interval with its average monthly stocks return. Upon that, we calculate the variance of stocks return. 3.2.2 Variance The formula to calculate variance is:

=
2

(K
t =1

Ki )

n 1

3.2.3 Standard Deviation The formula to calculate standard deviation is:

=
2

(K
t =1

Ki )

n 1

The denominator of n-1 represents degree of freedom, that is, the number of values in the final calculation of a statistic that are free to vary. The stand alone risk is the risk that is specific to an investment asset. However, the stand alone risk or unsystematic risk can be reduced through diversification.

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3.3 The relationship between the stock and the market In general, the CAPM model designates a single risk factor to account for the volatility inherent in an individual security or a portfolio of security. Beta measures the responsiveness of the change in the price of a security to the changes in the market index. In CAMP model, beta measures systematic risks. 3.3.1 Covariance Covariance is a measure of how much two random variables change together. A positive covariance means that asset returns move together. A negative covariance means returns move inversely. One method of calculating covariance is by looking at return surprises (deviations from expected return) in each scenario. Another method is to multiply the correlation between the two variables by the standard deviation of each variable.

The covariance formula is:

COV ( a, b ) = ra r a rb r b n 1

)(

Where:

r
r

= nominal return = expected return = numbers of year

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3.3.2 Correlation Coefficient The formula to compute the correlation coefficient is:
rA, B = Cov A, B

AB

The correlation coefficient has a maximum value of +1 and a minimum value of -1. A value of +1 means the two assets move in the same direction perfectly and is called, perfect positive correlation. A value of -1 means the two assets move in the opposite direction perfectly and is called perfect negative correlation. A value of 0 means the movements of the two assets are perfectly uncorrelated to each other. Combining two investments with large negative correlation in a portfolio would create diversification because this could stabilize the rates of return over time, reducing the standard deviation of the portfolio rates of return and hence the risk of the portfolio. 3.3.3 Beta Beta is defined as a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. This shows the relationship between the company return and the market return. The formula to compute the beta of a portfolio is:
i =
ri ,m i

represents the beta of an investment asset i, ri,m represents the correlation coefficient of i the investment asset i with the market return, i represents the standard deviation of the investment asset i and lastly m represents the standard deviation of the market return. 3.3.4 Covariance Matrix However, in excel, we use covariance matrix to compute the beta of each asset. To compute the covariance matrix in excel, we first rename the matrix of the excess return ( K i K i ) as M_1.

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To compute the covariance matrix, we highlight a 16 x 16 matrix in excel and key in the formula of:
= MMULT (TRANSPOSE ( M _ 1), M _ 1) / 260

Then, we press Ctrl + Shift +Enter simultaneously.

To derive the beta, we can key in the formula of:

i =
Covi ,m

2m

To do so in excel, Covi,m is the covariance of each individual asset with the market return and the 2m is the variance of market return (KLCI). Alternatively, the beta of an individual asset can be derived by the formula of:
= SLOPE(U6 : U196,$AJ$6 : $AJ$196)

The U6:U196 represents the array of data of each individual stock return and the
$AJ$6 : $AJ$196 represents the array of data of markets return and is fixed by pressing

F4 button.

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3.4 Portfolios Risk and Return Investing in a portfolio of assets is ideal than investing in a single asset. As the golden rule says: never put all your eggs in one basket and therefore we should diversify our investments. By investing in a portfolio of assets, we can reduce unsystematic risks. 3.4.1 Portfolio Variance First of all, we arrange our data in a systematic manner. Secondly, we arrange the weight of each individual asset in a 15 x 1 matrix column and renamed as W_1. Thirdly, we rename the covariance matrix as had previously computed as COV_M. The formula to compute portfolio variance is:
= MMULT ( MMULT (TRANSPOSE (W _ 1), COV _ M ), W _ 1)

And press CTRL + SHIFT + ENTER simultaneously. The portfolio standard deviation is equivalent to the portfolio variance to the power of 0.5.

3.5 Plotting the efficient frontier When all the data are good, we will plot the efficient frontier based on the output as derived from the computation.

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4.0 INTERPRETATION OF RESULTS 4.1 Average Weekly Return

After the computation have been done. The results of average weekly return for 15 companies in the period of 5 years are shown as above. The purpose for the average weekly return is to show that the probability of the percentage of average weekly return that we can obtain from investing into those companies. The highest return average weekly stock return goes to CYBER TOWER with average of 1.67% while the opposite which is the lowest is goes to SCOMI with average of -0.22%. With the 15 companies listed, 13 out of the 15 companies shown positive feedback of average weekly stock return while the rest is shown as the negative average weekly stock return. The KLCI (Kuala Lumpur Composite Index) play the role as to measure the average weekly market return. The data have shown that the average weekly market return is 0.16%. Thus, it will give the general description to describe the company performance in the market by compare them with the KLCI data. The companies give the higher average weekly stock return after compare with the average weekly stock market return were SAPURA with 0.98%, LAFARGE with 0.34%, P.NIAGA with 0.20%, CYBER TOWER with 1.67%, LEADER STEEL with 0.20%, AHMAD ZAKI with 0.31%, FREIGHT with 0.31%, BERJAYA with 0.87%, MHC with 0.48%, and finally the PRESTIMA with 0.20%. CYBER TOWER was able to outperform the market mainly because the technology sector was disseminated throughout the economy.
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There is no sector of the modern economy that technology does not touch and that does not rely upon the technology sector to improve quality, productivity, and/or profitability. As of December 30, 2010, the Companys major shareholder was Ikhtiar Syahdu Sdn Bhd with a 43.94% stake in the Company. In August 2011, the Company incorporated a subsidiary Starvista Limited. Thus, it becomes well perform in the stock market.

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4.2 Average Annual Return

The chart above describe that the average annual stock return for the 15 companies. The average computation is done by multiple the average weekly returns with 52 weeks. The higher average annual return recorded was CYBER TOWER with 86.99%, while the lowest was SCOMI with -11.37%. With the market annual return was recorded as 8.08%, SAPURA, LAFARGE, P.NIAGA, CYBER TOWER, LEADER STEEL, AHMAD ZAKI, FREIGHT, BERJAYA, MHC, and PRESTIMA were come out with the well performed in the stock market. On the yearly basis, the performance of CYBER TOWER and SAPURA are quite impressive. SAPURA was recorded as the second higher average annual return because Sapura Crest Petroleum is involved in drilling, installation of pipelines and facilities, marine services, operations and maintenance as well as development and operation of oil and gas fields. One of the key components in Malaysias economy is the oil and gas; it stated about 30% from the countrys manufacturing income and about 8% of annual gross domestic product. For the financial year ended 31 Jan 2011, the company registered a net profit of RM231million, up 34% from its previous financial year while revenue stood at RM3.2billion. Operationally, the group's order book stood at RM8.5billion.

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In year 2011 Sapura Crest was achieve with the risk service contract award of the Berantai marginal oil field development by national oil company to a consortium comprising three players Sapura. The consortium is expected to fork out someRM2.45billion to develop Berantai, located about 150km off Terengganu on the East Coast of Peninsular Malaysia. The annual return for SCOMI was excessive below the market annual return. The SCOMI had failed to development it business activity to gain the return for it investors.

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4.3 Variance

The chart above shows the calculated of variance for fifteen companies. The definition of variance is measure of volatility or total risk. . Variance is a mathematical expectation of the average squared deviations from the mean. The variance can help investors to determine the risk that they need to take when purchasing a specific security. From this research, Cyber Tower show highest variance with amount 0.03270. This show that the investors has highest risk if purchase Cyber Towers security. Then, a lower variance of companies is Pharmaniaga Berhad with amount 0.00111. This mean that a security of Pharmaniaga Berhad is lowest risky from another company and it is safe for investors.

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4.4 Standard Deviation

The chart above shows the standard deviation of the 15 companies from different sectors. Standard deviation is the square root of variance and thus, standard deviation is a measure of risks as well. Cyber Tower had the highest standard deviation and the second highest was SAPURA with 0.11591 as its result. Pharmaniaga Berhad had the lowest standard deviation with 0.03331 means it had the lowest risk. Stand-alone risk is measured by the standard deviation or the square root of variance of a specific assets stock return. In portfolio management, the stand alone risk measures the undiversified risks of an individual asset. From the output, Cyber Tower had the highest standard deviation which means, it had the highest stand alone risk. Although, Cyber Tower had the highest stand-alone risk, however, investors can reduce the unsystematic risks by diversifying its investments. In fact, investors can achieve the same level of return at a lower level of risks by varying the weights of each asset in the portfolio because the unsystematic risk can be eliminated through diversification. The portfolio that gives the highest return at the given level of risk is called the optimal portfolio and shall be plotted on the efficient frontier. SAPURA had the second highest standard deviation and we believe this is due to the volatility in the underlying commodity price of palm oil in futures trading. PRESTIMA had the second lowest standard deviation, because PRESTIMA is a real estate investment trust fund so it is less risky.

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From the output, BERJAYA had the third highest standard deviation was 0.08774. MK LAND had the fourth highest standard deviation was 0.08038. Standard deviation for LEADER STEEL was 0.07893. Standard deviation for SCOMI was 0.07676. Standard deviation for FACB was 0.07349. Standard deviation for AHMAD ZAKI was 0.07322. Standard deviation for MHC was 0.05853. Standard deviation for LAFARGE was 0.05278. Standard deviation for KSL was 0.05128. Standard deviation for FREIGHT was 0.04355. Standard deviation for TOP Glove was 0.04253.

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4.5 Correlation of Coefficient Matrix 4.5.1 Covariance

A Covariance means measure of the degree to which return on two risky assets move in tandem. The assets can said move together when a covariance is positive and a negative covariance means return move inversely. A method that can use to calculating covariance is by looking at return surprises in each scenario and multiple the correlations between two variables by the standard deviation of each variable. On the table show that Cyber Tower has highest covariance with amount 0.03270 and Pharmaniaga is smaller covariance with amount 0.00111.

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4.5.2 Correlation

The correlation of coefficient matrix shows the correlation of coefficient between two assets. Similar to covariance matrix, correlation of coefficient matrix measures the relationship between two asset s. The different between the two matrixes is that, correlation of coefficient has its own maximum and minimum value whereas covariance doesnt. The maximum value of correlation of coefficient is +1 and minimum value is -1. The correlation of coefficient allows investor to measure the strength of relationship whether positive or negative between the two assets. In portfolio management, investors tend to include assets that are negatively correlated with the portfolios assets in order to reduce the total risks of the portfolio. Modern portfolio concepts say that combining assets that are negatively correlated can result in risk reduction in a portfolio. From the output above, the higher positive correlation between KLCI is Scomi Group Bhd with amount 0.6667. This means that Scomi Group Bhd will follow all changes of KLCI. Then, the smaller correlation with the KLCI is Top Glove with amount 0.0352. Therefore, in order to reduce the total risks of portfolio, investors should choose individual asset that is smaller correlated with the portfolio assets such as Top Glove.

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4.6 Beta

The meaning of beta or also known as beta coefficient is measure of the volatility or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta indicates how the price of a security responds to market forces. The more responsive the price of a security is to the changes in the market, the higher that securitys beta. The beta for the overall market is equal to 1.0. Then, a beta equal 1 mean that the securitys price will move with the market and the security will be less volatile than the market if its beta less than 1. While, a beta more than 1 indicates that the securitys price will be more volatile than the market. From the calculate of 15 companies, the companies that show beta more than one is MHC Plantations Bhd with amount 1.2367, Ahmad Zaki Resources Bhd with amount 1.8066 and Scomi Group Bhd with amount 2.0911. This shows that the price of three companies has more volatile than the market. Besides that, the others companies has beta lower than one mean they less volatile than the market. Then, they are also less responsive to changing returns in the market and less risky. The companies that has beta lower one is Top Glove, Sapura, KSL Holdings, Lafarge, Pharmaniaga Bhd, Cyber Tower, Leader Steel, Mk Land, Freight Management Holding Bhd, FACB Industries Incorporate Bhd, Berjaya and Prestima.

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4.7 Portfolio Standard Deviation (When Short Selling was disallowed)

Standard Deviation (Market) 0.024474 Market Return 8.08%

Standard Deviation (Portfolio) 0.020932 Risk Free Rate 3.05%

Table above shows the overall performance of the portfolio which consists of the 15 companies from different sector. The optimal portfolio variance is 0.000438 and the optimal portfolio standard deviation is 0.02932. The market return as calculated earlier was 8.08% and the risk free rate based on Treasury Bill 3 months was 3.05%. The risk premium was 5.03% which means the return in excess of the risk-free rate of return that an investment is expected to yield that the extra risk that the investor would take. The individual assets that included in the portfolio were Top Glove, KSL, Lafarge, Pharmaniaga, Scomi, Cyber Tower, Ahmad Zaki, Freight, MHC, Prestima. The rest have been excluded where solver did not give weights. This is primarily because, short selling was disallowed. Therefore, individual assets with negative weights will be excluded. The optimal portfolio is built by presetting the condition that, the portfolio variance must be at minimum by varying the weights of each individual asset in the portfolio. The optimal portfolio gave highest return for a given level of risk.

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In order to prove that, an optimal portfolio can achieve a given level of annual return at a lower risk, we test the argument using scenario analysis. At condition A, we want the optimal portfolio to achieve the same level of annual return as the same as the individual stock of MK Land which is -0.00007561 or -0.00756% but at a lower level of risk. At condition B, we want the optimal portfolio to achieve the same level of annual return as the same as the individual stock of PharmaNiaga which 0.001952 or 0.1952% but at a lower level of risk. As for selected individual Stock: Stock Name MK Land PharmaNiaga Standard Deviation 0.080384 0.033313 Annual Return -0.00393 0.101503

In order to prove that, investing in a portfolio of assets can eliminate unsystematic risks, we done the test using solver. In fact, individual stock that had the highest standard deviation was MK Land with, standard deviation of 0.080384 and annual return of -0.00393. Individual stock that had the lowest standard deviation was PharmaNiaga ,with standard deviation of 0.033313and annual return of 0.101503. Thus, investors should always target on the optimal portfolio that locates on the efficient frontier because the optimal portfolio able to give highest return for a given level of risk than individual stock. When short selling was disallowed, investors should buy Top Glove, KSL, Lafarge, Pharmaniaga, Scomi, Cyber Tower, Ahmad Zaki, Freight, MHC, Prestima at the weight of 18%, 4%, 3%, 30%, 1%, 3%, 10%, 9%, and 21% respectively.

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4.8 Efficient Frontier (When Short Selling was allowed)

0.002310 0.002305 0.002300 0.002295 0.002290 0.002285 0.002280 0.002275 0.002270 0.002265 0.002260 0.0004380.0004380.0004380.0004380.0004380.0004380.000438

Series1

The graph above shows the efficient frontier (when short selling was disallowed). The efficient frontier describes the relationship between the return that can be expected from a portfolio and the riskiness of the portfolio. Investors can look the efficient frontier because it can gives the best return that can be expected for a given level of risk or the lowest level of risk needed to achieve a given expected rate of return. The weights of each individual stock as included in the optimal portfolio are 18% Top Glove, 4% KSL Holding, 4% Lafarge, 30% Pharmaniaga, 1% Scomi, 0.46% Cyber Tower, 3% Ahmad Zaki, 10% Freight Management, 9% MHC Holding and 21% Prestima. Only ten stocks were included because short selling had been disallowed.

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All portfolios plotted on the efficient frontier are optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Investors should always target on the portfolios that locate on the efficient frontier because the choice of investment onto the optimal portfolios depends on the risk appetite of investors. The investors can choose to invest into optimal portfolios that locate on the upper if they want to have more return, however, the risk too increase proportionately.

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4.9 Portfolio Standard Deviation (When Short Selling was allowed) Short selling means to sell a certain amount of borrowed shares from a third party now and repurchase the sold shares at a later date in order to return the borrowed shares to the third party. Short selling attempts to make a profit from the falling in price by selling the borrowed shares now at a higher price and intended to repurchase the same shares at a later date at a lower price and return to the third party. In our sample, we conduct short selling with the following way: STOCK TOP GLOVE KSL LAFARGE PHARMANIAGA SCOMI CYBER TOWER AHMAD ZAKI FREIGHT MHC PRESTIMA SAPURA LEADER STEEL MK LAND FACB BERJAYA LONG(BUY) 18.03% 5.93% 5.02% 29.87% 0.22% 0.43% 2.42% 10.74% 9.45% 22.84% SHORT(SELL)

-1.65% -1.10% -0.33% -1.26% -0.61%

When investors conduct short selling, investors will long (buy) some shares and short(sell) some shares in order to reap a better profit by actively managing their portfolio. Investors should hold shares that will appreciate in value in the future and sell shares now that will depreciate in value in future. In short selling, the sold shares are expected to be repurchased from the open market at a lower price and the spread between the selling price at initial date (t0) with the repurchased price at later date (t1) is the profit to the investor.

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Based on the computation, we should establish a long position for Top Glove, KSL, Lafarge, Pharmaniaga, Scomi, Cyber Tower, Ahmad Zaki, Freight, MHC and Prestima. On the other hand, we should establish a short position for Sapura, Leader Steel, MK Land, FACB and Berjaya. Pharmaniaga is a blue chip stock because its business earnings on average showed an uprising trend. The continual growing in population and demand for medical products are two power forces that keep Pharmaniaga to continue enjoying a steady and good business opportunities. The business itself was rather profitable. For the most recent 5 years, from 2007-2011, Pharmaniaga had a compound annual growth 11%. The strong growth in sales was mainly attributed to the effect of the Pharmaniaga in developing medical products that should meet the varying needs of the local citizens. Prestima had the second largest weight in the long position. The company is the premier producer and supplier of high quality tinplate for both domestic and export market. The company enjoyed a compound annual sales growth 17.48% from year 2007-2011. However, the growth in revenue soon dipped from RM 853,350 000 to RM 660, 565 000 from 20112007. The sharp slipped in sales revenue was mainly due to the outbreak of Global Financial Crisis. . The European debt concerns had further ignited the bearish sentiments in a fairly volatile market condition. Therefore, when the global economy moved towards better, we believe that Prestima will restore its glory and will continue yielding a higher compound annual growth in sales. Hence, we should establish a long position on Prestima in an anticipation of a better global economy and a greater sales revenue growth for Prestima in the near future. Next, we should long (buy) Top Glove because it is worlds largest rubber glove manufacturer. In view of the uncertain global economics ahead, most investors may prefer to invest in a safer investment instrument. . Hence, Top Glove is expected to rise in value and we should buy. Freight Management is expected to continue from the growing needs in technologies of the local market as well as the global because technological usage of the world has increased. Most of the international freight service such as sea, rail, air freight and tug barge service, customs brokerage and distribution container haulage and conventional trucking service needs the higher in there technologies. For example, the year on year global semiconductor sales grew by 10.7% in 2011 to a record RM327.1 million. Thus, Freight is expected to grab a share on this robust business opportunities and its stock price will appreciate in value in the near future.
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MHC, KSL, Lafarge, Scomi, Cyber Tower and Ahmad Zaki are expected to continue appreciate in value in view of their good historical growth. Therefore, we should buy those stocks. In addition, we should sell Sapura, Leader Steel, MK Land, FACB and Berjaya too. This may due to the fact that, these stocks could be being overvalued for now and were expected to fall in value in future.

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4.10 Efficient Frontier (When Short Selling was allowed)

The table above shows the efficient frontier when short selling was allowed. The optimal portfolios lie on the efficient frontier where these portfolios offer the highest return for a given level of risk. From the table above, the minimum standard deviation was 0.002 however, the portfolio return was -0.957%. However, investors can increase their return by investing in a riskier optimal portfolio. This can be done by investing into the optimal portfolios that locate at the upper end of the curve. This is consistent to the risk and return trade off theory, that is, higher the risks bring higher the return. When short selling was allowed, we should buy Top Glove, KSL, Lafarge, Pharmaniaga, Scomi, Cyber Tower, Ahmad Zaki, Freight, MHC and Prestima at the weight of 18.03%, 5.93%, 5.02%, 29.07%, 0.22%, 0.43%, 2.42%, 10.74%, 9.45% and 22.84% respectively, and we should sell Sapura, Leader Steel, MK Land, FACB and Berjaya at the weight of -1.65%, -1.10%, -0.33%, -1.26% and -0.61% respectively. We have done the portfolio optimization process successfully.

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5.0 CONCLUSION The portfolio optimization shows that investors can achieve a higher return on investment for a given level of risk by investing their wealth in a portfolio of stocks. The optimal portfolio gives the highest return for a given level of risk because the risk is reduced by including individual stock that is negatively correlated with the portfolios stocks. Through diversification, investors can reduce unsystematic risks because these risks are unique to a specific stock. In this working paper, we have shown the process of conducting the portfolio optimization process when short selling was allowed and disallowed. We have come out with two efficient frontiers that were, efficient frontier without short selling and efficient frontier without short selling. Investors should always invest in optimal portfolios that lie on the efficient frontier. When short selling was disallowed, investors should buy Top Glove, KSL, Lafarge, Pharmaniaga, Scomi, Cyber Tower, Ahmad Zaki, Freight, MHC, Prestima at the weight of 18%, 4%, 3%, 30%, 1%, 3%, 10%, 9%, and 21% respectively.When short selling was allowed, we should buy Top Glove, KSL, Lafarge, Pharmaniaga, Scomi, Cyber Tower, Ahmad Zaki, Freight, MHC and Prestima at the weight of 18.03%, 5.93%, 5.02%, 29.07%, 0.22%, 0.43%, 2.42%, 10.74%, 9.45% and 22.84% respectively, and we should sell Sapura, Leader Steel, MK Land, FACB and Berjaya at the weight of -1.65%, -1.10%, -0.33%, -1.26% and -0.61% respectively. In short, investors should not invest in a single stock. Instead, investors should invest in a portfolio of stocks because the optimal portfolio can reduce the stand-alone risk by including a set of individual stocks that are negatively correlated with each other. The unsystematic risks were reduced through diversification, leaving only systematic risk to be taken by the investors. If an investor wishes to have more return, he or she can investment on the optimal portfolios that are located on the upper end of the efficient frontier, however, the risks will increase proportionately with the increase in portfolio return as well. Investors are assumed to adopt rational behaviour and prefer more wealth at a lower level of risk. We would like to end our conclusion by advising investors to continue actively searching for top performing stocks in order to create an optimal portfolio of their own that gave a higher return at a lower level of risks. In fact, investors can construct a better optimal portfolio than the optimal portfolio as built by us by including more top performing stocks in their own portfolio.
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Also, investors should conduct active portfolio management by actively managing its portfolio. Investors are recommended to review their portfolio performance on periodical basis so that the actual performance as realized will be about the same as what had being initially expected. This can be done by actively changing the weights of each individual stock of the portfolio or by changing the individual assets in the portfolio, in order to yield a higher return for a given level of risk. The principal ideology behind portfolio optimization is to develop an optimal portfolio that gives higher return for a given level of risk. Investors are advised to follow the portfolio optimization process as indicated in this working paper. Lastly, in view of the high volatility in the current stock market and some possible political rallies in Malaysia, it is advised to hold cash for now and invest only when the stock market is regaining its strength. The European debt crisis concerns had created a lot of volatility in the stock market and investors should conduct a close monitoring on the global economy outlook.

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