Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON APPLICATION OF CAPITAL ASSET PRICING MODEL (CAPM) IN ANALYSIS OF LISTED RETAIL STOCKS ON THE VIETNAM STOCK MARKET NGUYEN THI MAI TRANG ID No: 19046117 Intake 3 Supervisor: Dr. TRAN THI XUAN ANH September 2020 0 ACKNOWLEDGEMENTS Over a year of pursuing Master of Science in Finance of the University of the West of England, the contents designed for the curriculums as well as the dedicated instructing and tutoring of the teachers helped me to improve a lot of financial knowledge and other soft skills. I believe that these knowledge and skills will help me develop myself more and more, especially in the better career in the future. First of all, I would like to thank my tutor Dr.
Tran Thi Xuan Anh who gave me a lot of helpful and wonderful feedbacks, comments and ideas for me to complete my study program. Second, I would also like to thank my family, friends and colleagues who have always supported and helped me throughout my study and research. Finally, I thank all of the faculty and program staff for supporting me throughout the course. 1 EXECUTIVE SUMMARY This dissertation studies knowledges related to CAPM model (Capital Asset Pricing Model), including but not limited to theoretical background of CAPM and its mathematical basis, assumptions, advantages and disadvantages.
At the same time, this dissertation also delves into the CAPM model's development and expansion over time and through actual studies and researches, as well as summaries of the studies that have been done related to the CAPM model in different countries around the world, especially in Asia and Vietnam. This dissertation researches on Vietnam's Stock market in general and the retail industry in particular, analyzing opportunities and challenges for investing in retail stocks in the Vietnamese Stock market. This dissertation uses CAPM model to value retail stocks that are listed on the Vietnamese Stock market on both official stock exchanges, HOSE and HNX. There are 23 stocks of companies in the retail industry for data and analysis.
Based on the theories of the CAPM model to calculate, this dissertation shows which stocks are overvalued (8 stock codes) and which stocks are undervalued (15 stock codes). From the evaluation of the value of stocks, the research has selected potential stocks (with 6 selected stock codes) based on the criteria given (having positive return during the period starting from listing to June 30 2020, having positive returns from 2019 to June 30 2020, and is undervalued) to describe how to build an optimal portfolio, based on the lowest level of the risk of portfolio (lowest standard deviation). From the above research content, this dissertation points out limitations of CAPM application in valuation of retail stocks on the Vietnam Stock Market as well as some recommendations learnt from CAPM application in research. 2 TABLE OF CONTENTS ACKNOWLEDGEMENTS.
2 LIST OF GRAPHS. 6 LIST OF TABLES. Importance of the research topic. Purposes of the research topic.
Research Subject, Scope and Methods. 11 CHAPTER I: LITERATURE REVIEW. Theoretical background of CAPM and its mathematical basis. Overview of the CAPM.
Assumptions in CAPM. Assumptions on investors’ attitudes. Assumptions on capital market. Risk Premium for Market Portfolio.
Expected Rate of Return of Individual Securities. Security Market Line. CAPM with borrowing restrictions. CAPM with Zero Beta Ratio.
CAPM with Multiple Investment Terms. CAPM with Transaction Costs and Taxes. Advantages and Disadvantages of CAPM. Stability of Beta.
Relationship between Expected Rate of Return and Beta. Effects of Non-normal Distribution. Unusual Limitations of CAPM application. Fama and French studies and findings.
Criticism from Researchers of Multi-factor Model. 33 SUMMARY OF CHAPTER I. 38 CHAPTER II: DATA AND METHODOLOGY. Conditions for the model application.
Data and Methodology. Assessment of retail stocks on the Vietnam stock market. Building the Optimal Portfolio. 44 SUMMARY OF CHAPTER II.
46 CHAPTER III: RESULTS OF APPLICATION OF CAPM IN ANALYSIS OF RETAIL STOCKS ON THE VIETNAM STOCK MARKET. Vietnam Stock Market and Prospect of Retail Stock Investment on the Vietnam Stock Market. Overview of the Vietnam Stock Market. Opportunities and Challenges to Invest in Retail Stocks.
Application of CAPM in Analysis of Retail Stocks on the Vietnam Stock Market. Rate of Return. Coefficient of Variation. Estimation of CAPM Parameters.
Risk-free Interest Rate. Appliance of CAPM in Retail Stock Valuation. Building the Optimal Portfolio. Stock selection for optimal portfolio.
Building optimal portfolio. 71 SUMMARY OF CHAPTER III. 74 4 CHAPTER IV: ASSESSMENT OF CAPM APPLICATION IN ANALYSIS OF RETAIL STOCKS ON THE VIETNAM STOCK MARKET. Limitations of CAPM application in valuation of retail stocks on the Vietnam Stock Market.
General Limitations of CAPM Application on the Vietnam Stock Market. Limitations of CAPM Application in Valuation of Retail Stocks on the Vietnam Stock Market. Measure of Risk - Standard Deviation. Some recommendations learnt from CAPM application in research.
83 SUMMARY OF CHAPTER IV. 89 5 LIST OF GRAPHS Graph 1.1: Capital Allocation Line (CAL) and Capital Market Line (CML) Graph 1.2: Stock Market Line (SML) Graph 1.3: Stock Market Line (SML) and Alpha Graph 1.4: Efficient Frontier with different borrowing & lending rates Graph 1.5: Efficient portfolios and zero-beta portfolios Graph 1.6: SML and zero-beta portfolios Graph 1.7: CAPM with transaction costs Graph 3.1: Scale and Growth of Retail Industry in Vietnam Graph 3.2: Proportion of logistic revenue in total retail sales in Vietnam Graph 3.3: The proportion of households in Vietnam Graph 3.4: The proportion of ranges of age in Vietnam Graph 3.5: Median Age of Countries Graph 3.6: Porter’s Five Forces Model of Retail industry in Vietnam Graph 3.7: Standard deviations of retail stocks with positve rate of return Graph 3.8: Coefficient of variation of retail stocks with positve rate of return Graph 3.9: Fluctuation of the VN-Index from 2010 to 2020 Graph 3.10: Beta Ratio of Retail stocks Graph 3.11: The sets of Expected Return and Standard Deviation of Portfolio Graph 4.1: Interest rates of Vietnam 5-year government bonds from 2018 to 30 June, 2020 Graph 4.2: Distribution of the rate of return of Retail stocks 6 LIST OF TABLES Table 2.1: List of stocks in the retail industry of Vietnam for the research Table 3.1: Information and Financial indicators of Retail companies on the Vietnam Stock Exchanges Table 3.2: Year when Retail stocks are listed in Vietnam Stock Exchanges Table 3.3: Average Daily/Annual Rate of Return of Retail stocks Table 3.4: Terms and Conditions of Government Bond Table 3.5: Valuations of Retail stocks Table 3.6: The stocks are selected for the portfolio Table 3.7: Average Daily Return and Standard Deviation of selected stocks Table 3.8: Correlation of selected stocks Table 3.9: Covariance of selected stocks Table 3.10: The sets of Proportion of stocks in the portfolio 7 ACRONYMS CAPM Capital Asset Pricing Model SML Stock Market Line CML Capital market line CAL Capital allocation line M Market portfolio P/E Price/Earning BV Book Value DCF Discounted Cash Flows HOSE Ho Chi Minh Stock Exchange HNX Ha Noi Stock Exchange IT Information Technology GDP Gross Domestic Product CFA Chartered Financial Analyst SD Standard Deviation VBMA Vietnam Bond Market Association SSC State Securities Commission ROE Return on Equity ROA Return on Asset GMM General Method of Moments SIM Single Index Model OTC Over The Counter VSD Vietnam Securities Depository 8 INTRODUCTION 1. Importance of the research topic Along with the current boom of the financial market in general and the stock market in particular, the world has recognized the indispensable role of the financial mathematics in research and decision-making process for investment. Financial mathematics has played an important role in modernizing research in the financial and monetary field in general and financial investment in particular.
The examples are applying financial mathematics through risky business on derivatives market, managing risks in stock market fluctuations, developing and managing portfolios, valuing financial assets, effective market theory, credit rating theory and etc. The stock market has experienced unpredictable fluctuations over the past few years, and the strong ups and downs of the market have made investors realize that sentiment- and rumor-based investment poses lots of risks. Risk management requires effective tools to assess investment opportunities and help build effective portfolios. Investors also need to strictly follow the new investment strategy to seek profits on the market in a sustainable way.
This is an opportunity for financial mathematics to find a firm foothold both in theoretical and practical research. CAPM (Capital Asset Model) was first introduced by Sharpe (1964) and Lintener (1965) nearly 60 years ago. It is a typical model for applying financial mathematics to analysis and investment. The first success of this model is to show how to assess the risk of capital flows and to estimate the prices and expectations of future gains that investors will achieve when investing in the project.
This is a 9 model that has been developed since 1964 but it is still an effective tool in risk management and investment capital valuation in the world. With the aim of putting financial mathematics into practice as well as improving in-depth knowledge for professional work, the research project “Application of Capital Asset Pricing Model (CAPM) in analysis of listed retail stocks on the Vietnam stock market” will meet the actual needs of the market, reinforce the theory, and help researchers better understand CAPM both in terms of economic significance and application of mathematics in economic analysis. Purposes of the research topic To provide theoretical clarification of CAPM and its mathematical basis. To help readers approach the method of researching and analyzing stock prices on the basis of data processing and modern, but not so complicated, calculation techniques.
To specify the applicability of CAPM in analyzing listed stocks in the Vietnam retail industry, helping investors to make the right investment decisions when analyzing and investing in these stocks by checking whether the market values such stocks high or low. Research Subject, Scope and Methods The research focuses on CAPM and the application of financial mathematics in the analysis of listed retail stocks in Viet Nam under CAPM. The scope of the research is the group of retail stocks listed on the Hanoi Stock Exchange and Ho Chi Minh City Stock Exchange, by the end of June 2020. 10 The research uses the statistical method, collects data on price fluctuations of listed stocks of companies in the retail industry in the form of exel data sheets for a period of five years, uses Eviews software for analysis of average, standard deviations, for graphs and for calculating the correlation coefficient between the random variables.
Eviews is a common statistical software, easy to use in practice, particularly in economics. Research Structure Chapter I: Literature review Chapter II: Data and Methodology Chapter III: Results of application of CAPM in analysis of retail stocks on the Vietnam Stock market Chapter IV: Conclusion and recomention of the application of CAPM in analysis of retail stocks on the Vietnam Stock market 11 CHAPTER I: LITERATURE REVIEW 1. Theoretical background of CAPM and its mathematical basis 1. Overview of the CAPM CAPM is considered the essence of the modern economics and finance theory.
Hary Markowitz was the first to lay the foundation for the current investment theory in 1952. 12 years later, CAPM was developed by William Sharpe, John Linner and Jan Mossin. In this model the expected rate of return equals the risk-free rate plus the risk premium calculated on the basis of systematic risks of each security. Non- systemic risks are not taken into account because they have been eliminated by the perfectly diversified portfolio.
Based on this, CAPM is known as a model that reflects the relationship between risk and expected return for each asset as well as the portfolio.