Investment Planning: Asset Relocation 2

Let us take the 5 stocks as example for two methods of asset relocation.

First method:
The first method was shown in the previous blog titled "Investment Planning: Asset Relocation".
Scenario:
10-month-performances for five stocks were tabulated as a study case.
Stock i average return = AVERAGE(array stock i)
Stock i standard deviation = STDEV(array stock i)

Risk free rate = 2.5%/12 = 0.21% per month

Desired return = 2.5% per month

Sharpe Ratio = (Average Return - Risk Free)/Standard Deviation

Sharpe Ratio in lowest to highest order:
GenM,Haio,NTPM,Pbbank,LPI

Excel Solver Constraints:
Constraint#1: optimized weightage <=1 Constraint#2: desired return per month = 2.5% Constraint#3: sum of optimized weightage = 1 Current invested or value weight:
GenM : HaiO : NTPM : PbBank : LPI = 0.21 : 17.2 : 25.6 : 51.9 : 3.2

Excel Solver optimized weightage:
GenM : HaiO : NTPM : PbBank : LPI = 0.58 : 19.56 : 15.44 : 33.02 : 31.4

Reference of Relocation from Method 1 optimization:
Strategy 1: reduce GenM weightage or sell off all
Strategy 2: reduce high weightage of Pbbank and NTPM
Strategy 3: increase LPI weightage

Action recommended:
1. Stop buying GenM, Pbbank and NTPM. Extra cash is used to buy HaiO and LPI. Second Method:
This is the second method which takes into account of standard deviation.
Variance stock i = VARP(Array stock i)
Covariance stock i to j = COV(Array stock i, Array stock j)

Variance Term stock i = Stock i weightage*SUMPRODUCT(Array weightage, Array COV or/and VARP)

Portfolio variance = Summation of all variance term stock
Portfolio standard deviation = SQRT(profolio variance)

Excel Solver constraint:
Constraint#1: Optimized weightage >=0
Constraint#2: desired retrurn = 2.5% per month
Constraint#3: sum of optimized weightage = 1





Current invested or value weight:
GenM : HaiO : NTPM : PbBank : LPI = 0.21 : 17.2 : 25.6 : 51.9 : 3.2
Current portfolio return: 2.05%
Current portfolio standard deviation: 4.13%
Current portfolio Sharpe ratio = (2.05-0.21)/4.13 = 0.4455

Excel Solver optimized weightage:
GenM : HaiO : NTPM : PbBank : LPI = 7.39 : 3.1 : 15.35 : 31.78 : 42.38
Optimized portfolio return: 2.5%
Optimized portfolio standard deviation: 2.03%
Optimized portfolio Sharpe ratio = (2.5-0.21)/2.03 = 1.128

Conclusion:
Method 2 has a big different perspective in relating risk and return relationship. Our common sense that applied at Method 1 is beaten down by the statistical approaches.

Method 1: GenM(hold), HaiO(increase), NTPM(decrease), PbBank(decrease), LPI(increase)
Method 2: GenM(increase), HaiO(decrease). NTPM(decrease), PbBank(decrease), LPI(increase)

Thanks to the Markowitz,s CAPM for a better understanding on the risk and return relationship.

WEIDA Short Term Speculation

1) ROE@FY2010F = AFTER TAX & MI P&L/SHARE HOLDER FUND
= (1H10+9M10 AFTER TAX & MI P&L)/(Latest SHARE HOLDER FUND)
= (13.949+7.966)/143.380
=15.28%

ROE over 5 years= AVERAGE(7.84,12.48,8.76,10.43,15.28)
= 10.96%

ROE's Standard Deviation = STDEV(7.84,12.48,8.76,10.43)
= 2.99%

Take risk free rate as 2.5% p.a.
Sharpe Ratio = (10.96%-2.5%)/2.99%
=2.83

2) Margin@FY2010F = PRETAX P&L/TURNOVER
= (1H10+9M10 PRETAX P&L)/(1H10+9M10 TURNOVER)
=(14.834+22.65)/(153.478+223.718)
= 9.93%

Margin over 5 year =AVERAGE(10.51,11.17,10.06,9.5,10.12,9.93)
=10.22%

Margin over 5 year Standard Deviation = STDEV(10.51,11.17,10.06,9.5,10.12,9.93)
=0.57%

Average/Stdev = 17.92

3) Current Ratio = Current Asset/Current Liability
= 187808/114693
= 1.64

4) EPS@FY2010F = 0.105+0.060
=0.165

EPS trend over 5 years (0.064,0.184,0.083,0.103,0.165F)

Forecast EPF growth = (0.165-0.103)/0.103 = 60.2% growth.

If (0.9*FY2010F's EPF)<(FY2010's EPS)<(1.1*FY2010F's EPF), then it's worth to hold it for a longer period.

5) DPS@FY2010F, min = 0.00
DPS@FY2010F, max = 0.075
Payout ratio (min and max)F = from (0.00/0.165) to (0.075/0.165)
= from 0.0% to 45.5% - No dividend policy

Dividend Yield@FY2010F, min = 0.00/0.77 = 0.00%
Dividend Yield@FY2010F, expected = 0.04/0.77 = 5.19%
Dividend Yield@FY2010F, max = 0.075/0.77 = 9.74%

Dividend trending over 5 years (0.02,0.04,0,0.075,0.04F)

6) Selling at Discount because NAV > Price, 1.13/0.77 =1.47, Selling at 47% discount to the NAV (30-Apr-10).

Price (30-Apr-10) = 0.77
P/E (FY2009) = 0.77/0.103 = 7.48
P/E (FY2010F) = 0.77/0.165 = 4.67

If WEIDA maintains P/E at 7.48, price of WEIDA will be 7.48*0.165 = 1.23 speculatively.