A Comparison of Equity Portfolio Returns between
Date
2011-04-18
Authors
du Toit, Deirdrè
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Abstract
The purpose of the research is to assess whether the developing markets of the world
provide the same return on equity investment as South Africa. Portfolio investments in
these markets have increased from US$ 100 million in 1985 to US$ 47.9 billion in 2000.
With globalisation and investors looking for lucrative investment opportunities to enhance
their portfolio returns (Harvey, 1995b), the researcher compared the South African and
Bulgarian stock market returns and their Sharpe ratios over the past five years (2003-
2008), in order to provide some guidance for investors wishing to diversify their securities
investment portfolios in emerging market economies.
The Sharpe ratio is one of the most widely used statistical measures in financial analysis
and is an approach to evaluate the performance of a portfolio in a mean-variance
framework. It is the ratio of the expected excess return of an investment to its expected
volatility (standard deviation) (Hodges, Taylor & Yoder, 1997) and is useful because it is
an indication of whether a portfolio's returns are due to smart investment allocations or
merely a result of excess risk.
Portfolios were created with large and small cap stock, as well as value and growth
stocks. The primary methodology employed was quantitative mathematical modelling,
and the results of the research were explained using both descriptive and inferential
statistics.
The research showed clearly that some benefit exists when investing in both the
Bulgarian and the South African markets. The benefit seems to increase when an
intelligent weighting system (Solver) is used to allocate the holding weights of the
individual stocks included in the portfolios.
The comparison of whether an investment in both markets is strategically better than
having money invested in the individual markets, based on a risk to return comparison
(Sharpe ratio), indicates that there is no statistical significant difference other than the
vi
South African large cap and value styles. A combined portfolio investment in these
styles produced Sharpe ratios that were statistically significantly better indicating that the
return per unit of risk taken was superior.
The research reveals that when funds are invested in both markets, according to the
style mandates and a comparison made between Solver weighted and equal weighted
portfolios, the Solver weighted portfolios render Sharpe ratios that are statistically
significantly better in three of the four styles, thus indicating that the return per unit of risk
taken is better following a Solver weighted approach
Description
MBA - WBS
Keywords
Equity investments, Equity investments in developing markets