Portfolio Construction - Assignment

Running head: PORTFOLIO CONSTRUCTION
Portfolio Construction
Name of the Student:
Name of the University:
Author Note:

1PORTFOLIO CONSTRUCTION
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Selection of the Stocks:..........................................................................................................2
Review of various Literature:.................................................................................................4
Limitations of Efficient Market Hypothesis:.........................................................................6
References:.................................................................................................................................7

2PORTFOLIO CONSTRUCTION
Introduction:
The following report is the construction and maintaining of a portfolio consisting of
stocks of the Singapore stock exchange. The stocks have been chosen using a stock screener
and a portfolio comprising of the stocks is constructed. The shares for the portfolio are
bought and the relevant taxes and duties which are applicable are paid for the investment
(Dhrymes 2017).
Discussion:
Selection of the Stocks:
The stocks selected for the portfolio are trading at the Singapore Stock exchange and
the historical returns for the stock is taken for a period of Five years. The historical price of
the stocks are taken as weekly data for the simplification of the calculations. Thus the stocks
which had been used for the selection of the portfolio are provided in the following points.
 Capitaland Mall Trust
 Challenger Technologies
 DBS group Holdings
 Comfort Del Gro
 First Reit
 Frasers
 Haw Par
 Hong Kong Land
 Ifast
 Micro Mechanics
 Raffles

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 Riverstone
 Sats
 Yangzijiang
 Boustead
 Genting Singapore
 Maple Tree Holdings
 Sheng Siong
Thus, the historical returns of the stock are taken for a period of five years. The beta
for the stocks are calculated using the slope function using the FTSE straits all shares index
as the index. Thus the Beta for each share is calculated which is used in the capital asset
pricing model to calculate the expected return of the stock. Thus the expected return of the
stock is taken as the base and a stock screener is applied with a constraint. The constraint
which is applied in the stock screener is the historical return of the stock should exceed the
expected return calculated by Capital Asset Pricing Model (blog.seedly.sg).
Thus the stock which are selected using the following screener is used to construct an
equally weighted portfolio of the stocks. The shares are purchased by paying the transaction
cost and stamp duty and a portfolio is constructed for the selected shares. The shares which
are selected for the portfolio construction are,
 DBS Holdings
 Capitaland Mall and Trust
 Challenger Technologies
 Frasers
 Haw Par
 Micro Mechanics

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 Riverstone
 Sats
 Maple Tree
 Sheng Siong
Thus a portfolio is constructed with these shares and trading will be conducted using these
shares as per the market circumstances and economic conditions (finance.yahoo.com/quote).
Review of various Literature:
The markets are a place where investors invest their funds with a view to generate
returns. This view is dependent on many factors which can be having a superior knowledge
for the concerned investment, having sentiments towards particular investments or using
speculation to earn returns. Some investors tend to use hedging as a strategy with which they
can generate returns from the investments.
All the strategies which is employed by the investors depend on the efficiency of the
markets. The efficiency of markets means how quickly the market can absorb the new
information in regards to particular investments, which is reflected in the price of the stock.
The stock price can react positively or negatively for an information which has been
disclosed in the market, and the time within which the markets tend to reflect the price
considering the new information highlights the level of efficiency of the markets.
The efficient market hypothesis which is theory in regards to the financial markets
states that when the markets are efficient it is not possible to generate abnormal returns on a
continuous basis. The financial markets highlight the prices taking into consideration of the
all publicly available information. The risk which plays a central role in the efficient market
hypothesis is difficult to model, hence the relevance and the effectiveness of this theory
cannot be tested (Hamid, Suleman, Ali Shah, Akash & Shahid 2017).

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Even though the theory of the efficient market hypothesis is difficult to test, it forms a
framework for various asset pricing models. Thus most of the asset pricing models, are based
using the theory of the efficient market hypothesis. Thus, stock prices are difficult to predict,
however say a merger and acquisition event is to take place for a company in the near future
and all the available information in the market. The investors would tend to trade on the stock
till the information is no longer useful and the stock price highlights the value of the
information. Similarly, when an economic downturn is expected investors have the relevant
information which supports the expectation, it would lead to fall in the price in the markets
due to this event (Ausloos, Jovanovic & Schinckus 2016).
The financial markets which are efficient or not can be used to derive the relation of
the stock prices and whether they have the random walk theory. The random walk theory,
highlights that the stock prices are continuously in motion and like the geometric Brownian
mean and the direction of the price is difficult to predict in the absence of any information.
Thus the price of the stock is affected by the information which is available to the public and
moves the price accordingly as per the information and this forms the base of the efficient
market hypothesis (Rossi & Gunardi 2018).
In the 1930’s research conducted by cowls highlighted that the investors are unable to
outperform the markets. This research was carried ahead in the future where the time series
property of the stocks were analysed. The results highlighted that the stocks had a property of
time series and the financial markets followed random walk in the absence of available
information. Another research conducted in the 1969 by Fama, Fisher, Jensen and Roll
highlighted that the stock prices can be determined during some events as to in which
direction the movement of the stock is expected. Thus, this laid the foundation and the
importance of efficient market hypothesis.

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The markets can be characterized as being efficient in three forms which are weak,
semi strong and strong. Thus, the characterization is based on how efficiently the markets
take on the new information which can be reflected in the stock prices. Thus when a market is
in the weak form the investors have a substantial amount of time to generate abnormal returns
from the market. They can analyse the markets using technical tools and fundamental tools to
generate abnormal returns. In the Semi strong markets the investors can generate abnormal
returns but only by using the fundamental tools. The time taken for the investors to analyse
the markets using technical tools in inefficient within which the price trading in the markets
reflect the value of the information. In the strong markets use of either technical tools or
fundamental tools is inefficient and investors fail to generate abnormal returns. The abnormal
returns can be generated in the markets of strong efficiency only by using insider information
which is unethical. In the weak form and semi strong form generating abnormal returns using
the historical prices of the investments is possible to some extent and it is not possible in the
strong markets (Kane 2018).
Limitations of Efficient Market Hypothesis:
The efficient market hypothesis has been criticized on various grounds has been
claimed to be irrelevant theoretically and empirically. The changes in the stock prices is
being claimed to be due the behavioural psychology of the investors which consists of
number of biases. The biases can be cognitive or emotional and is said to impact the decision
making capabilities of investors and hence cause change in the stock prices (Wright, 2019).
The behavioural biases have been said to have the major impact on the prices of the
investment such as overconfidence bias, regret aversion bias, loss aversion bias herd
mentality and many more such biases. The lack of investors to beat the market and generate
superior return is affected by these biases which tends to affect the investors. As an empirical
research highlighted the extent to which the credit crisis occurred in the year 2008, was partly

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because of the herd mentality of investors. As many investors were selling their holdings it
led to the markets falling with the increased pressure which supports the herd mentality of the
investors (Atanasov, Pirinsky & Wang, 2018).
References:
36 Singapore Shares You Should Watch In 2020. (2019). Retrieved 14 January 2020, from
https://blog.seedly.sg/singapore-shares-to-watch/
Atanasov, V., Pirinsky, C., & Wang, Q. (2018). The Efficient Market Hypothesis and
Investor Behavior.
Ausloos, M., Jovanovic, F., & Schinckus, C. (2016). On the “usual” misunderstandings
between econophysics and finance: Some clarifications on modelling approaches and
efficient market hypothesis. International review of financial analysis, 47, 7-14.
Baker, M., Taliaferro, R., & Burnham, T. (2017). Optimal Tilts: Combining Persistent
Characteristic Portfolios. Financial Analysts Journal, 73(4), 75-89.
Dhrymes, P. J. (2017). Portfolio theory: origins, Markowitz and CAPM based selection.
In Portfolio Construction, Measurement, and Efficiency (pp. 39-48). Springer, Cham.
Hamid, K., Suleman, M. T., Ali Shah, S. Z., Akash, I., & Shahid, R. (2017). Testing the weak
form of efficient market hypothesis: Empirical evidence from Asia-Pacific
markets. Available at SSRN 2912908.
Kane, J. (2018). A quantitative assessment of the Actively vs Passively managed debate,
framed within the context of the Efficient Market Hypothesis (Doctoral dissertation,
Dublin, National College of Ireland).

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Rossi, M., & Gunardi, A. (2018). Efficient market hypothesis and stock market anomalies:
Empirical evidence in four European countries. Journal of Applied Business Research
(JABR), 34(1), 183-192.
Wright, I. (2019). Empirical Evaluation of the Efficient Market Hypothesis: A Machine
Learning Approach.
Yahoo is now part of Verizon Media. (2020). Retrieved 14 January 2020, from
https://finance.yahoo.com/quote/OV8.SI/history?p=OV8.SI&.tsrc=fin-srch