Abstract
This research creates a crossed asset portfolio formulation dynamically with stocks and fixed-income instruments. This dynamic portfolio formulation did not require normally distributed data and accommodated the correlation among class assets which kept changing across time. This was based on the existing assumptions in the modern portfolio theory which were rarely found in the real world, for example, when stock return was normally distributed, the correlation among securities would be constant at all times. The data used in this research were LQ45 Index as a stock market proxy, S and P Indonesia Corporate Bond Index (representing the corporate bond market) and S and P Indonesia Government Bond Index data (representing the government bond market) during the period of June 4th, 2007 to April 11th, 2016. This research found that the dynamic portfolio of stock with either government or corporate bonds was able to reduce the level of risk significantly despite producing a lower rate of return, compared to the ones specifically invested in the stock market. Investors who believe in the principles of prudent investment may use this dynamic approach in shaping the portfolio with stocks and fixed-income instruments.
Highlights
The article entitled “Portfolio Selection” written by Markowitz (1952) and refined by Markowitz (1959) has become a cornerstone for the modern portfolio theory known today (Fabozzi, Gupta, & Markowitz, 2002)
The S&P Indonesia Corporate Bond Index is an index designed to measure the performance of corporate bonds from Indonesia which are denominated by Indonesian Rupiah (IDR), while S&P Indonesia Government Bond Index is an index designed to measure the performance of Indonesia government bonds which are predominantly in Indonesian Rupiah (IDR)
Based on the analysis performed using the Dynamic Conditional Correlation (DCC)-GARCH, the results show that the DCC value between the LQ45 index return and the S&P Indonesia Corporate Bond Index return during the research period is in a range of -0.05 to 0.15
Summary
The article entitled “Portfolio Selection” written by Markowitz (1952) and refined by Markowitz (1959) has become a cornerstone for the modern portfolio theory known today (Fabozzi, Gupta, & Markowitz, 2002). It was found by research such as Aparicio and Estrada (1997), Canedo and Cruz (2013), Chion et al (2008), Kamath, Chakornpipat, and Chatrath (1998), Rachev, Stoyanov, Biglova, and Fabozzi (2004), and Richardson and Smith (1993) Another assumption which is often criticized is the assumption mentioning that the correlation among securities is constant at all times (Eimer, 2011; Ogata, 2012; Robiyanto, 2018a, 2018c; Robiyanto, Wahyudi, & Pangestuti, 2017). The correlation between assets will tend to change along with the current time and market conditions (Katzke, 2013; Zinecker, Balcerzak, Faldzinski, Pietrzak, & Meluzin, 2016)
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