Analysing Risk & Return Profiles: A Comparative Study of the Indonesian Stock Market against International Benchmarks

Abstract

The Indonesian stock market, also known as IDX, has emerged as a prominent player in the financial landscape of Southeast Asia. It has attracted the interest of investors who regard it as a potential source of massive returns. Nevertheless, empirical research has consistently demonstrated that developing nations’ stock markets tend to exhibit a notable degree of volatility. This volatility is well recognised for its propensity to amplify risk levels for domestic investors, potentially leading to a decrease in the demand for stock market investments. The observed phenomenon in Indonesia reveals a very low degree of stock market engagement when compared to benchmark nations. This suggests that the high volatility in the market may be a contributing factor. Understanding the risk-return characteristics of the IDX in comparison to recognised benchmark indexes is crucial for making educated investment decisions. This study will conduct a comparative analysis of the risk-return attributes of the IDX in comparison to six well recognised benchmark indexes, specifically the S&P 500 Index, the Straits Times Index, the FTSE 100 Index, the Shanghai Stock Exchange Composite, the BSE Sensex, and the BOVESPA Index. The study employs several risk and return measures, such as standard deviation, coefficient of variation, and the Sharpe ratio, to assess the relative performance of the IDX. The objective of this study is to evaluate the comparative appeal of the Indonesian stock market when compared to international benchmarks, with a specific focus on risk and return. The aim is to determine the optimal level of stock market involvement and the inclination towards risk aversion or risk-seeking behaviour among retail investors in Indonesia.