ICM Midterms Compiled

Pasar Modal Islam
- Minggu 1
Nur Dhani Hendranastiti

1 September 2022
Class arrangement
§ PMI B: Nur Dhani Hendranastiti/Tika Arundina

§ Contact: nurdhani@ui.ac.id
§ Syllabus
§ !"#$%&'()*offline + Emas (emas.ui.ac.id –login using your SSO)
§ Book access: https://vitalsource-
ui.slite.com/p/channel/PotzFVRSEip8c2cYnyjfYe (follow the
guideline)
2
1 Financial System
5
What is financial system?
What are the functions?
6
Global Financial System
Demanders of Flow of loanable funds

funds (mainly (savings) Suppliers of
business firms funds (mainly
and households)
governments) Flow of financial
services, incomes, and
financial claims
7
Functions of Financial
System and Market
!"#$%&' ()"*+, -$./$0$+1 :7)0$+

The global system of The financial instruments Provide liquidity for Furnish credit to
financial markets and sold in the money and savers who hold finance consumption
institutions provides a capital markets provide financial instruments and investment
conduit for the public’s an excellent way to store but are in need of spending.
savings. wealth money.
2"13)%+' 4$'56278+)9+$8% 28*$91

Provides a mechanism for The financial markets offer The financial markets are a
making payments for goods protection against life, health, channel through which
and services, in the form of property, and income risks, by governments may attempt
currency, checking permitting individuals and to stabilize the economy and
accounts, debit cards, credit institutions to engage in both avoid inflation.
cards, digital cash, etc. '+,-.,/#'+01 and '+,-*'2345$+&0.
8
Intermediary in Financial
Market
6+'25$*7+0#052 – Direct lending gives rise to direct claims

against borrowers.
Flow of funds
(loans of spending power for an agreed-
upon period of time)
Borrowers Lenders
(DBUs) (SBUs)
Primary Securities
(stocks, bonds, notes, etc., evidencing direct
claims against borrowers)
ü Simple û Difficult to match & risky

9
Market
82(+3+'25$*7+0#052 – Direct lending with the aid of

market makers who assist in the sale of direct claims
against borrowers.
Primary Securities Primary Securities
(direct claims (direct claims
against Security against
borrowers) borrowers)
brokers,
Borrowers dealers, & Lenders
(DBUs) investment (SBUs)
bankers
Proceeds of Flow of funds
security sales (loans of spending
(less fees and commissions) power)
ü Lower search (information) costs

û Risky & matching is still required
10
Market
903+'25$*7+0#052 – Financial intermediation of

funds. Secondary Securities
Primary Securities (indirect claims against ultimate borrowers
(direct claims against ultimate borrowers issued by financial intermediaries in the form
in the form of loan contracts, stocks, of deposits, insurance policies, retirement
bonds, notes, etc.) savings accounts, etc.)
Financial intermediaries
Ultimate (banks, specialized banks, insurance Ultimate
borrowers companies, credit unions, mutual funds, finance lenders
(DBUs) companies, pension funds) (SBUs)
Flow of funds Flow of funds

(loans of spending power) (loans of spending power)
ü Low risk & affordable

11
Market
12
Structure in the Financial
Market
Structure of
Financial Market
Based on trading
Based on the Based on the issues Based on the
methods in
Instrument Security secondary markets maturity
Debt Markets Primary Markets Exchange Markets Money Markets
Over-the-counter
Equity Markets Secondary Markets Capital Markets
Markets
13
Types of Financial Market in
the Global Financial System
The !"#$%&!'()$* is for short-term The !"#$%&!'()$*&may be

(one year or less) loans, while the subdivided into Treasury bills,
+',-*'.&!'()$* finances long-term certificates of deposit (CDs), bankers’
investments by businesses, acceptances, commercial paper,
governments, and households. interbank funds and Eurocurrencies.
In particular, governments borrow The +',-*'.&!'()$*&may be
from commercial banks in the !"#$%& subdivided into mortgage loans,
!'()$*, while in the +',-*'.&!'()$*, municipal bonds, consumer loans,
insurance companies, mutual funds, Eurobonds and Euronotes, corporate
security dealers, and pension funds stock, and corporate sukuks, notes
supply the funds for businesses. and bonds.
14
Types of Financial Market in
the Global Financial System
In ",$#&!'()$*/, financial In the /,"*&!'()$*, assets are traded

instruments are sold to the highest for immediate delivery (usually
bidder, and they can be traded as within one or two business days).
often as is desirable before they A 23*3($/ or 2"(4'(1&!'()$* is
mature. In #$0"*-'*$1&!'()$*/, the designed to trade contracts calling
instruments are sold to one or a few for the future delivery of financial
buyers under private contract. instruments.
Financial capital is raised when new 5,*-"#/&!'()$*/ enable contracts
securities are sold in the ,(-!'(%& that grant the right to buy or sell
!'()$*/. Security trading in the certain securities at specific prices
/$+"#1'(%&!'()$*/ then provides within a certain time to be traded.
liquidity for the investors.
15
Then, what is Islamic
financial system?
16
;6'1'+)36$%6"698/%+71<'6)98%831698%'$'+$%&68=6
=$%"%9$"*63"75)+'>6=$%"%9$"*6$%'+$+/+$8%'>6=$%"%9$"*6
$%'+7/3)%+'6"%063"75)+6?"7+$9$?"%+'6+,"+6
8?)7"+)6"*8%&6@'*"3$96?7$%9$?*)'6A$+,6+,)6?/7?8')6
8=63))+$%&6+,)6B"."'$0 C8DE)9+$#)'F68=6!,"7$",
17
2 Islamic Capital
Markets
18
What makes difference
between conventional and
Islamic capital markets?
19
Islamic Capital Markets
:"?$+"*6B"75)+ @'*"3$969"?$+"*6 :"?$+"*6B"75)+

is an activity related 3"75)+ is a mechanism of securities
with :4;"+5*&%%2'+01*#03* is an activity in the trading between seller and
$'#3+01*&%*,254'+$+2,, capital market that buyer (individual,
public companies related follows ,/#'+<#/ corporation, government)
with the securities principles 6(-!'(%&7'()$*&à
issued, along with transaction between the
institutions and issuer and investor
professions related with
the securities 8$+"#1'(%&7'()$*&à
transaction between
investors who want to sell
and buy
20
21
Shariah Principles in
Economics/Muamalat
§ Avoiding illegitimate activities

GDE)9+$#): •• Prohibition of harmful products and services
Promotion of well being of all Prohibition of the use of illegitimate sources
and unfairness
mankind ('#/(#$#0 "+" =#"#(+0) § Usefulness
27$%9$?*)': •• Productive and non-speculative
• Providing greater access of resources to

Avoiding idle and inefficient use of resources
§ Promotion of justice
• Transparency and honesty society
§ Prohibition of:-
• Fair transactions • >+;# (usury, interest)
• Fair competition • ?/#'#' (uncertainty combined with cheating)
• Mutually beneficial •• @#+,+' or Qimar (gambling)
9/$+-#' (hoarding)
transactions •• >+,/A#/ (corruption)
B#/" (ignorance)
22
Functions and Objectives of
the Islamic Capital Market Intermediaries
between demanders
and suppliers of fund
Plays a
complementary role
As an investment Contributes to
to Islamic banking
economic growth
alternative for capital and $#-#%4" sectors
owner
As a source of fund
Provide
collection Makes available opportunities for
various financial diversification of
services
risks
To support growth of Facilitate the

availability of
investment liquidity by enabling
secondary trading of
securities
23
What is the basic law for
Islamic capital market and
its principles?
25
Law in the Islamic Capital
Markets
Law
Islamic Law Positive Law
Fatwa Private Law Acts/regulations
26
Implementation of Shari’ah
Principles in Capital Market
Transactions that are not aligned with

Activities and types of business that are not shari’ah principles:
aligned with ,/#'+<#/ principles: • Fake supply demand (;#+<*0#C,D)
•Gambling & games categorised as gambling • Transaction without delivery of the goods/services
•Conventional financial services • Selling goods/services that are not being owned
•Trade of risk, gharar, maysir (;#+<*#".(#<34(/short selling)
•Production, distribution, trade, supplier: • Insider information (insider trading)

• Margin transaction ('+;#)
§ Products/services that the substances are
unlawful • Hoarding (+/$+-#')
§ Products/services that are unlawful not • Contains bribe ('+,DA#/)
because of substances, but based on DSN-MUI • Other transactions involving speculation (1/#'#'),
§ Products/services that can harm moral or manipulation, fraud ($#3"+,), hide the defects
disadvantegous (1/+,D,D), contains deceit($#1/'+')
27
Differences between
Conventional and Islamic
Capital Markets
Conventional Capital Market Islamic Capital Market
The underlying transaction does not need to The underlying transaction should follow
follow shari’ah principle shari’ah principles
No prohibition on riba Prohibition on riba
No prohibition in selling assets that are not Only sells assets that have been owned
owned (short selling)
Only abide to positive law and regulation Always abide to regulation, and align with fatwa
DSN
Debt-based transaction No debt-based transaction
28
Differences between Bond
and Sukuk
Feature Conventional debt market Islamic debt market
Business Activity No limitation Sharia-compliant business
Use of proceeds No limitation Sharia-compliant
Market exposure Islamic investors are not Wider base of investor

allowed
Type of structure Debt-base only Asset, investment, and debt-
based
Asset requirement Not necessary, except for Necessary
asset-backed securities
29
What kind of company that can
be part of Islamic capital
market?
Types of business, products, services, contract, corporate

governance are based on ,/#'+<#/ principles
Compulsary to sign and fulfill conctractual requirement based on
,/#'+<#/ for the securities issued
Compulsary to ensure that the business fulfill ,/#'+<#/ principles
and have ,/#'+#/.5&(:"+#052 &%%+52'
If in any case, the company unable to fulfill the requirement, the
securities issued are no longer part of ,/#'+<#/ securities
30
Types of Shari’ah-compliant
Securities
Market Price Stipulation

Shari’ah
stocks Sukuk Market price of shari’ah securities should
reflect the actual value/condition of the
underlying asset and/or aligned with regular
market mechanism, reasonable, efficient, and
Islamic
Shari’ah asset-backed
not being engineered
mutual fund
securities
Islamic
commercial
notes
31
32
33
3 Indonesian
Financial System
34
Who are the stakeholders in
governing the Indonesian
financial system?
35
Indonesian Financial System
36
Indonesian Financial System
• Majority of emerging market has bigger size of banking industry rather than
capital market
• The development of capital market is needed to balance the risk so that it is
not only borne by the banking sector
• It also provides alternative capital sources for the corporations à might be
more efficient to raise funds from capital market rather than getting
loan/credit
37
Indonesian Capital Market
Structure
Financial Services Authority

(Otoritas Jasa Keuangan-OJK)
38
4 Islamic Capital
Market in
Indonesia
39
When was the 1st time
being established? What
was the product?
40
Sejarah Pasar Modal
Syariah di Indonesia
41
Pasar modal syariah di Indonesia
42
Group Task for Next Week
In a group,
1. Please prepare and discuss the case of game stop that was viral in
2021. Is there any violation on the ,/#'+<#/ principle? If there is any
violation, what kind of violation?
2. Please select 5 (five) stocks that are categorised as ,/#'+<#/ stocks?
Explain the reasons for those 5 stocks to be categorised as ,/#'+<#/
stocks based on the ,/#'+<#/ screening criteria (qualitative and
quantitative)
Prepare your answer on a power point file, submit on EMAS by next

Wednesday, and 1 group will present.
43
THANK YOU
47
Islamic Capital Markets
- Week 2
08 September 2022
Group Task-Discussion
In a group,
1. Please prepare and discuss the case of game stop that was viral in
2021. Is there any violation on the shari’ah principle? If there is any
violation, what kind of violation?
2. Please select 5 (five) stocks that are categorised as shari’ah stocks?
Explain the reasons for those 5 stocks to be categorised as shari’ah
stocks based on the shari’ah screening criteria (qualitative and
quantitative)
Prepare your answer on a power point file, submit on EMAS by next

Wednesday, and 1 group will present.
2
Company
What is the objective of What should the owners
establishing a company? pay attention to in
managing their company?
What do the owners need

What are the legal forms of
to establish a company?
business?
3
Concept of Modern
Corporation
▪ There are three important issues related with types of corporation:

1. The amount of funding needed to set up the company
2. The amount of control the founder wishes to divest in the company
3. Whether profit should be spread amongst a few or many
▪ Business entity can be in the form of unincorporated or incorporated. The main difference is on
the separation of its legal entity between owner and perusahaan:
▫ Unincorporated does not separate between owner and company, making all the risk and liability goes
directly to the owner
▫ Incorporated business has its own legal personality that they can conduct transaction using their own
name
▫ One characteristic of incorporated business is it has limited liability form where many individuals or
organization entity jointly own the company (join stock company)
▫ The shareholders usually receive dividend or capital gain as the cash flow
4
Company and Stocks
What is the relationship Stock can be defined as a sign of capital participation of an
individual or institution in a company or corporation.
between stock and
company? By investing in a company, the party has the claim for the
company’s income, assets, and right to attend the General
Meeting of Shareholders.
5
Stocks
What are the types of
stocks? What are the What is the gain of
differences between those? investing in stocks?
What are the categories of How can we measure the

stock? performance of stock?
6
Types of Stock
▪ Common Stock
• It has voting rights in the General Meeting
• Prioritized if company issues new shares
• Responsibility is limited on the number of shares
▪ Preferred Stock – Has special rights
• Has higher priority in dividend distribution
• Accumulated dividend
• Convertible, can be converted into common stock, if there is agreement between
shareholders and company
7
Benefits of Investing in
Stock
▪ Dividen
▫ Dividend is profit sharing given by company and comes from the income. Dividend is
given after getting the agreement from shareholders in the General Meeting. If an
investor wants to receive dividend, he/she must own the stock for a relatively long
period, until the ownership term is in the period where he/she is acknowledged as the
shareholder who has the right to obtain the dividend.
▪ Capital gain
▫ Capital gain is the different between buying price and selling price. Capital gain is
obtained through the trading activities carried out in the secondary market.
8
Category of Stock
▪ Speculative stocks
▪ Blue Chip stocks Used as speculative; the fundamentals do not show
a strong business model, but the trader expects that
are well-established companies that have a large market
capitalization. it will change one day
▪ Income stocks ▪ Cyclical stocks

are directly affected by the economy's performance and
are equities that provide regular income by distributing a
typically follow economic cycles of expansion, peak, recession,
company's profits, or excess cash, through dividends that are and recovery.
▪
higher than the market average.
▪ Growth stocks
Emerging growth stocks
Relatively small and young company that operates
refer to equities expected to grow at a faster rate compared to
in very good growth industry
▪
the broader market
Defensive stocks
It generally provide consistent returns in most economic
conditions and stock market environments
9
Stock Index
What is stock index? Do we have a shari’ah
index?
How to construct an index? Why do we have shari’ah

How do we weight the index? What is the
index? objective?
10
Stock Index
▪ Index represents the trend of stock price

movement
▪ Index for all stocks listed in Indonesian Stock
Exchange is called as IDX Composite (or
IHSG)
▪ If the index increases, the stock price in the
exchange market generally increases; vice
versa
11
12
Index Formulation
▪ Target market and security selection:

• Asset classes (equities, fixed income, real estate, etc)
• Geographical region
• The exchange on which securities are traded
• Other characteristics (liquidity, type of stock, etc)
▪ Index weighting
▪ Index management:
• Rebalancing → adjusting the weight of the constituent securities in the index
• Reconstitution → changing the securities in the index
13
Index Weighting
14
Shari’ah Index
▪ The fundamental drawback of conventional stock index is it only includes neutral screening criteria
▪ Sharia-compliant components are not included in the index
• Halal-haram issues on the core business is important for shari’ah stocks
• As well as the financial composition of the issuer
▪ Shari’ah stock index combines two methods:
• Use the existing weighting methods
• Combine the components of index calculation with shari’ah screening → select the securities that
can be used to calculate the index
▪ Consequences
• Number of shares decreases
• Companies with large market capitalization do not pass the screening process
15
Shari’ah Stock Index: Why?
▪ To gauge market sentiments or investor confidence in a comprehensive yet concise

manner
▪ To serve as market proxies for risk-adjusted performance
▪ To be used as proxies for asset classes in asset allocation models because indices
exhibit the risk and return profile of selected group of securities
▪ To be used as benchmarks to evaluate the performance of actively traded portfolios
16
Shari’ah Stock Index & Shari’ah Stock
What are the examples of How can we implement the

shari’ah stock index? screening criteria on
individual stock?
How is the screening

process for those indices?
Is there any difference?
Why?
17
Example
18
Example
19
Shari’ah Securities
Screening
Core Business Screening Financial Screening Shari’ah Stock Index
The main business and Financial structure of

Shari’ah Stock Index
product of the issuer the issuer
20
DJIM FTSE S&P MSCI HSBC AMIRI DIB AZZAD MEEZAN SC JII AAOIFI RJSI
Alcoholic Beverages × o × o o o o × o × o × o
Biotechnology
o o
(Genetic&Foetus)
Broadcasting and
× o × o o o o × o × × o
Entertainment
Conventional Financial
× o × o o o o × o × o × o
Services
Gambling × o × o o o o × o × o × o
Hotels × o × o o o × × o
Conventional Insurance × o × o o o o × o × o × o
Meat Production × o
Media Agencies* × × o × o
Pork-related (Non-halal)
× o × o o o o × o × o × o
products
Restaurants and Bars × o × o o o o × o o × o
Tobacco × o × o o o o × o o × o
Trading Gold and Silver × o
Weapon and Defense × o o o o o × × o
Stockbroking or share in
Sharia non-compliant ×
securities
o : core business
x : any involvement
21 * : except newspaper
Financial Ratio
FTSE FTSE
SC DJIM* DJIM** DJIM*** GlI* GlI** S&P SI MSCI AAOIFI JII Meezan HSBC DIB AZZAD AMIRI
I LIQUIDITY
1 Acc Rec/Total Asset < 47% < 45% < 70%
Acc Rec/12 Mth MA
2
Market Cap < 33% < 49% < 45%
Acc Rec +
3
Cash/Total Asset < 50% < 70%
Cash + Int Bearing
4 Sec + Acc Rec/Total
Assets ≤ 80% < 50%
Cash + Int Bearing
5 Sec/12 Mth MA
Market Cap. < 33% < 33% < 33%
Cash + Int Bearing
6
Sec/Total Assets < 33% < 33.33% < 33%
Total Illiquid
7
Asset/Total Asset
Net Liquid Asset
(CA-CL) Per
8
share/Market Price
Per share <1
22
Financial Ratio
II. INTEREST INCOME
SC DJIM* FTSE GlI* FTSE GlI** S&P SI MSCI AAOIFI JII Meezan HSBC DIB AMIRI
1Interest Income/Group Turnover ≤ 10% < 5% <5% <5%
2Interest Income/Gross Total Revenue
3Interest Income/Net Income
4Interest Income/Net Sales
5Interest Income/Total Income
Non Permissible Income plus Interest
Income/Revenue < 5% < 5%
Non Operating Interest
6
Income/Operating Income < 9%
Non Permissible Income other than
7
Interest Income/Revenue ≤ 5% < 5% < 5% ≤ 5%
8Income from Tobacco/Revenue ≤ 10%
Income from Shariah Non-compliant
9
Investment/Gross Revenue
Income fom Shariah Non-compliant
10
Activities/Total Income or Revenue < 5% < 5% <10%
PBTof Subs or Asso Co(non-halal
11
activity)/PBT of Group ≤ 5%
PBTof Subs or Asso Co(mixed rental
12
income)/PBT of Group ≤ 20%
PBTax of Subs or Asso Co(hotel &
13
resort)/PBT of Group ≤ 25%
Turnover of Subs or Asso Co(non-
14
halal activity)/Turnover of Group ≤ 5%
Turnover of Subs or Asso Co(mixed
15
rental income)/Turnover of Group ≤ 20%
23 Turnover of Subs or Asso Co(hotel &
16
resort)/Turnover of Group ≤ 25%
Financial Ratio
III DEBT
FTSE FTSE
SC DJIM* DJIM** DJIM*** GlI* GlI** S&P SI MSCI AAOIFI JII Meezan HSBC DIB AZZAD AMIRI
Total Debt/12 Mth
1
MA Market Cap < 33% < 33% < 33% < 30% < 33%
Total Debt/Total <
2
Asset < 33% < 33% < 33% 33.33% < 30% ≤40% < 30% < 30% < 33%
Total Debt/Total
3
Equity ≤45%
Total Interest-
5 based Debt + Pref
Shares/Total Equity
PROHIBITED
IV
INVESTMENT
Total investment of
the Investee
Company in
1
Shariah
noncompliant
business ≤ 33%
24
Issues in Screening Criteria
Financial ratio is based DSN MUI’s decision on screening Other consideration →

on each index criteria is based on fiqh “tafriq if too rigid, less
bayna halal wa haram” number of stocks can
be included
Do we treat sukuk the No standardization → it does not How about other

same as debt? make one index better than others issues, such as ethics?
25
Shari’ah Issues in Islamic Capital
Market
Following all the Is there any issue with how
discussions, is there any the stocks are being
shari’ah issues in Islamic traded?
capital market?
Is there any issue with the Is there any issue about the
form of modern transaction in capital
corporation? market?
26
Shari’ah issue related with
stock
▪ Issue 1 → Limited liability dan legal personality

• Musharakah concept is different from limited liability. Partnership in musharakah can seek funding from
other parties; when it is default, creditor can claim all the musharakah assets, including investment from
each partner
• In modern corporation, creditor only has claim on company’s asset (as legal personality) and it does not have
claim on shareholders’ fund
• Research conducted by OIC, and Syaikh Taqi Usmani allows company with concept of limited liability,
referring to similar practice on waqf, zakat, and baitul maal.
▪ Issue 2 → Joint stock company

• In classical musharakah, number of partner is relatively few, and the business only operates for specific
period. It is different from modern practice where there are many investors, and the business operates
without period limit
• Mazhab Syafii acknowledges the principle of khultah al-shuyu, where for a company with many owners, zakat
is charged on the company’s asset not individual owner.
27
Shari’ah issue related with
stock
▪ Issue 3 → Type of company

• Two main issues: main business activity operated by company (halal or haram) and source
of fund owned by company
• It implies on the types of company that can be owned/invested by a Muslim
▪ Issue 4 → Trading of shares
• Is trading of shares allowed? Stock represents ownership of a company. In classical
musharakah, partnership ends when one partner withdraws their investment. But in
modern corporation, shareholder can withdraw and sell their shares to other investors
• Prohibition in the fiqh resulted in prohibition of several transaction mechanism in the
capital market
28
Prohibited Transaction
Tadlis Front running Misleading info

(fraud/deception)
Taghrir Wash sale Pre-arrange trade
Najsy (fake order) Pump & Dump Hype & Dump Fake Order
Ihtikar (hoarding) Pooling interest Cornering
Ghisysy Mark at the close Alternate trade
Ghabn fahisy Insider trading
Bai’ al-ma’dum Short selling
Riba Margin trading

29
Group Task-For Week 3
Week 3 (Fundamental & Technical Analysis)
From 5 stocks that you have chosen in the previous week, please pick
3 stocks and discuss the following:
1. Please explain the fundamental analysis of those 3 stocks
2. Please calculate the stock price using Dividend Discount Model
3. Plot the stock price (daily price for 5 years) of those 3 selected
stocks (please download from Refinitiv Eikon –check the access
from FEB’s library: s.id/psbfeb). Is there anything you can explain
from the graphs?
Prepare your answer on a power point file, submit on EMAS2 by next

31
Wednesday, and 2 groups will present.
THANK YOU
32
Analysis of Investments and
Management of Portfolios
by Keith C. Brown & Frank K. Reilly
An Introduction to
Security Valuation
– An Overview of the Valuation Process
– Three-Step Valuation Process
Chapter 11
– Theory of Valuation
– Valuation of Alternative Investments
– Relative Valuation Techniques
– Estimating the Inputs: k and g
Group Task-For Week 3
Week 3 (Fundamental & Technical Analysis)
From 5 stocks that you have chosen in the previous week, please pick 3 stocks and
discuss the following:
1. Please explain the fundamental analysis of those 3 stocks
2. Please calculate the stock price using Dividend Discount Model
3. Plot the stock price (daily price for 5 years) of those 3 selected stocks (please
download from Refinitiv Eikon –check the access from FEB’s library: s.id/psbfeb). Is
there anything you can explain from the graphs?
Prepare your answer on a power point file, submit on EMAS2 by next Wednesday, and
2 groups will present.
2
Fundamental Analysis
• What is fundamental analysis in the valuation process?

• What are the steps?
11-3
Overview of the valuation process
• Two General Approaches
– Top-down, three-step approach
– Bottom-up, stock valuation, stock picking approach
• The difference between the two approaches is
the perceived importance of economic and
industry influence on individual firms and
stocks
• Both of these approaches can be implemented
by either fundamentalists or technicians
11-4
Overview of the valuation process
• The Three-Step Top-Down Process
– First examine the influence of the general economy
on all firms and the security markets
– Then analyze the prospects for various global
industries with the best outlooks in this economic
environment
– Finally turn to the analysis of individual firms in the
preferred industries and to the common stock of
these firms.
– See Exhibit 11.1
11-5
Exhibit 11.1
11-6
Three-Step Valuation Approach
• General Economic Influences
– Fiscal policy initiatives, such as tax credits or tax
cuts, can encourage spending
– Monetary policy though controlling money supply
growth or interest rate therefore affects all
segments of an economy and that economy’s
relationship with other economies
– Inflation causes changes the spending and savings
behavior of consumers and corporations
– Other events such as war, political upheavals in
foreign countries, or international monetary
devaluations exert strong effects on the economies
11-7
• Industry Influences
– Identify global industries that will prosper or suffer
in the long run or during the expected near-term
economic environment
– Different industries react to economic changes at
different points in the business cycle
– Alternative industries have different responses to
the business cycle
– Demographic factor and international exposure will
also have different impacts on different types of
industries
11-8
• Company Analysis
– The purpose of company analysis to identify the
best companies in a promising industry
– This involves examining a firm’s past performance,
but more important, its future prospects
– It needs to compare the estimated intrinsic value to
the prevailing market price of the firm’s stock and
decide whether its stock is a good investment
– The final goal is to select the best stock within a
desirable industry and include it in your portfolio
based on its relationship (correlation) with all other
assets in your portfolio
11-9
Does the Three-Step Process Work?
• Studies indicate that most changes in an
individual firm’s earnings can be attributed to
changes in aggregate corporate earnings and
changes in the firm’s industry
• Studies have also found a relationship
between aggregate stock prices and various
economic series such as employment, income,
or production
11-10
Does the Three-Step Process Work?
• An analysis of the relationship between rates
of return for the aggregate stock market,
alternative industries, and individual stocks
showed that most of the changes in rates of
return for individual stock could be explained
by changes in the rates of return for the
aggregate stock market and the stock’s
industry
11-11
Theory of Valuation
• What are the components to value an asset?

• How can we calculate the components?
• Based on the valuation, what should we decide?
11-12
Theory of Valuation
• The value of an asset is the present value of
its expected returns
• To convert this stream of returns to a value for
the security, you must discount this stream at
your required rate of return
• This requires estimates of:
– The stream of expected returns, and
– The required rate of return on the investment
11-13
Theory of Valuation
• Stream of Expected Returns
– Form of returns
• Earnings
• Cash flows
• Dividends
• Interest payments
• Capital gains (increases in value)
– Time pattern and growth rate of returns
• When the returns (Cash flows) occur
• At what rate will the return grow
11-14
Theory of Valuation
• Required Rate of Return
– Reflect the uncertainty of Return (cash flow)
– Determined by economy’s risk-free rate of return,
plus
– Expected rate of inflation during the holding period,
plus
– Risk premium determined by the uncertainty of
returns on
• Business risk; financial risk; liquidity risk; exchanger
rate risk and country
11-15
Theory of Valuation
• Investment Decision Process: A Comparison
of Estimated Values and Market Prices
– You have to estimate the intrinsic value of the
investment at your required rate of return and then
compare this estimated intrinsic value to the
prevailing market price
– If Estimated Value > Market Price, Buy
– If Estimated Value < Market Price, Don’t Buy
11-16
Valuation of Alternative Investments
• Bond valuation
• Preferred stock valuation
• Common stock valuation
– Dividend Discount Models
– Present Value of Operating Free Cash Flows
– Present Value of Free Cash Flows to Equity
11-17
Valuation of Bonds
• Valuation of Bonds is relatively easy because
the size and time pattern of cash flows from
the bond over its life are known:
– Interest payments are made usually every six
months equal to one-half the coupon rate times the
face value of the bond:
– The principal is repaid on the bond’s maturity date
• The bond value is defined as the present value
of its future interest and principal payments
11-18
Valuation of Bonds
Assume in 2009, a $10,000 par value bond due in
2024 with 10% coupon will pay $500 every six
months for its 15-year life. What is the bond price if
the required rate of return is 10%?
• Present value of the interest payments

$500 x 15.3725 = $7,686
• The present value of the principal
$10,000 x .2314 = $2,314
• The bond value
$7,686+$2,314=$10,000
11-19
Valuation of Bonds
• The $10,000 valuation is the amount that an
investor should be willing to pay for this bond,
given the required rate on a bond of 10%
• If the required rate of return changes, then
bond value will change inversely.
• What is the bond value if the return is 12%?
$500 x 13.7648 = $6,882
$10,000 x .1741 = 1,741
Total value of bond at 12 percent = $8,623
11-20
Valuation of Preferred Stock
• Owner of preferred stock receives a promise
to pay a stated dividend, usually quarterly, for
perpetuity
• Since payments are only made after the firm
meets its bond interest payments, there is
more uncertainty of returns
• Tax treatment of dividends paid to
corporations (80% tax-exempt) offsets the
risk premium
11-21
• The value is simply the stated annual dividend
divided by the required rate of return on
preferred stock (kp)
Dividend
V=
kp
• Assume a preferred stock has a $100 par
value and a dividend of $8 a year and a
required rate of return of 9 percent
$8
V = = $88.89
.09
11-22
• Given a market price, you can derive its
promised yield
Dividend
kp =
Price
• At a market price of $85, this preferred stock
yield would be
$8
kp = = .0941
$85.00
11-23
Valuation of Common Stock
• Two General Approaches
– Discounted Cash-Flow Techniques
• Present value of some measure of cash flow,
including dividends, operating cash flow, and free
cash flow
– Relative Valuation Techniques
• Value estimated based on its price relative to
significant variables, such as earnings, cash flow,
book value, or sales
11-24
Valuation of Common Stock
• Both of these approaches and all of these
valuation techniques have several common
factors:
– All of them are significantly affected by investor’s
required rate of return on the stock because this
rate becomes the discount rate or is a major
component of the discount rate;
– All valuation approaches are affected by the
estimated growth rate of the variable used in the
valuation technique
11-25
Discounted Cash-Flow
Valuation Techniques
• The General Formula
t =n
CFt
Vj = å
t =1 (1 + k )
t
Where:
Vj = value of stock j
n = life of the asset
CFt = cash flow in period t
k = the discount rate that is equal to the investor’s
required rate of return for asset j,
11-26
The Dividend Discount Model (DDM)
• The value of a share of common stock is the
present value of all future dividends
D1 D2 D3 D¥
Vj = + + + ... +
(1 + k ) (1 + k ) 2
(1 + k ) 3
(1 + k ) ¥
n
Dt
=å
t =1 (1 + k ) t
where:
Vj = value of common stock j
Dt = dividend during time period t
k = required rate of return on stock j
11-27
• The N-Period Model
– If the stock is held for only N period, e.g. 2 years,
and a sale at the end of year 2 would imply:
D1 D2 SPj 2
Vj = + +
(1 + k ) (1 + k ) 2
(1 + k ) 2
– The expected selling price, SPj2, of stock j at the
end of Year 2 is crucial, which is in fact the present
value of future expected dividends
11-28
• Infinite Period Model (Constant Growth Model)
– Assumes a constant growth rate for estimating all of
future dividends
D0 (1 + g ) D0 (1 + g ) 2 D0 (1 + g ) n
Vj = + + ... +
(1 + k ) (1 + k ) 2
(1 + k ) n
where:
Vj = value of stock j
D0 = dividend payment in the current period
g = the constant growth rate of dividends
k = required rate of return on stock j
n = the number of periods, which we assume to be infinite
11-29
• Given the constant growth rate, the earlier
formula can be reduced to:
D1
Vj =
k-g
• Assumptions of DDM:
– Dividends grow at a constant rate
– The constant growth rate will continue for an
infinite period
– The required rate of return (k) is greater than the
infinite growth rate (g)
11-30
Infinite Period DDM
and Growth Companies
• Growth companies have opportunities to earn
return on investments greater than their
required rates of return
• To exploit these opportunities, these firms
generally retain a high percentage of earnings
for reinvestment, and their earnings grow
faster than those of a typical firm
• During the high growth periods where g>k, this
is inconsistent with the constant growth DDM
assumptions
11-31
Valuation with Temporary
Supernormal Growth
• First evaluate the years of supernormal growth
and then use the DDM to compute the
remaining years at a sustainable rate
• Suppose a 14% required rate of return with the
following dividend growth pattern
Dividend
Year Growth Rate
1-3 25%
4-6 20%
7-9 15%
10 on 9%
11-32
Valuation with Temporary
Supernormal Growth
• The Value of the Stock (See Exhibit 11.3)
2.00(1.25) 2.00(1.25) 2 2.00(1.25) 3
Vi = + 2
+
1.14 1.14 1.14 3
2.00(1.25) 3 (1.20) 2.00(1.25) 3 (1.20) 2
+ 4
+
1.14 1.14 5
2.00(1.25) 3 (1.20) 3 2.00(1.25) 3 (1.20) 3 (1.15)
+ 6
+
1.14 1.14 7
2.00(1.25) 3 (1.20) 3 (1.15) 2 2.00(1.25) 3 (1.20) 3 (1.15) 3
+ 8
+
1.14 1.14 9
2.00(1.25) 3 (1.20) 3 (1.15) 3 (1.09)
(.14 - .09)
+
(1.14) 9
11-33
Exhibit 11.3
11-34
Present Value of
Operating Free Cash Flows
• Derive the value of the total firm by
discounting the total operating cash flows prior
to the payment of interest to the debt-holders
• Then subtract the value of debt to arrive at an
estimate of the value of the equity
• Similar to the DDM, we can have
– We use a constant rate forever
– We can assume several different rates of growth
for OCF, like the supernormal dividend growth
model
11-35
Present Value of
Free Cash Flows to Equity
• “Free” cash flows to equity are derived after
operating cash flows have been adjusted for
debt payments (interest and principal)
• These cash flows precede dividend payments
to the common stockholder
• The discount rate used is the firm’s cost of
equity (k) rather than WACC
11-36
Present Value of
Free Cash Flows to Equity
• The Formula
n
FCFEt
Vj = å
t =1 (1 + k j )
t
where:
Vj = Value of the stock of firm j
n = number of periods assumed to be infinite
FCFEt = the firm’s free cash flow in period t
K j = the cost of equity
11-37
Components for Valuation
• How can we estimate the growth (g) and required rate of return (k)?
• What are the necessary factors to be considered?
11-38
Estimating the Inputs: k and g
• Valuation procedure is the same for securities
around the world
• The two most important input variables are :
– The required rate of return (k)
– The expected growth rate of earnings and other
valuation variables (g) such as book value, cash
flow, and dividends
• These two input variables differ among
countries in the world
• The quality of these estimates are key
11-39
Required Rate of Return (k)
• The investor’s required rate of return must be
estimated regardless of the approach selected
or technique applied
• This will be used as the discount rate and also
affects relative-valuation
• Three factors influence an investor’s required
rate of return:
– The economy’s real risk-free rate (RRFR)
– The expected rate of inflation (I)
– A risk premium (RP)
11-40
• The Economy’s Real Risk-Free Rate
– Minimum rate an investor should require
– Depends on the real growth rate of the economy
• (Capital invested should grow as fast as the
economy)
– Rate is affected for short periods by tightness or
ease of credit markets
11-41
• The Expected Rate of Inflation
– Investors are interested in real rates of return that
will allow them to increase their rate of
consumption
– The investor’s required nominal risk-free rate of
return (NRFR) should be increased to reflect any
expected inflation:
NRFR = [1 + RRFR][1 + E (I)] - 1

where:
E(I) = expected rate of inflation
11-42
• The Risk Premium
– Causes differences in required rates of return on
alternative investments
– Explains the difference in expected returns among
securities
– Changes over time, both in yield spread and ratios
of yields
11-43
Estimating the Required Return
for Foreign Securities
• Foreign Real RFR
– Should be determined by the real growth rate within
the particular economy
– Can vary substantially among countries
• Inflation Rate
– Estimate the expected rate of inflation, and adjust
the NRFR for this expectation
NRFR=(1+Real Growth)x(1+Expected Inflation)-1
• See Exhibit 11.6
11-44
Exhibit 11.6
11-45
Estimating the Required Return
for Foreign Securities
• Risk Premium
– Must be derived for each investment in each
country
– The five risk components vary between countries
• Business risk
• Financial risk
• Liquidity risk
• Exchange rate risk
• Country risk
11-46
Expected Growth Rate
• Estimating Growth From Fundamentals
– Determined by
• the growth of earnings
• the proportion of earnings paid in dividends
– In the short run, dividends can grow at a different
rate than earnings if the firm changes its dividend
payout ratio
– Earnings growth is also affected by earnings
retention and equity return
g = (Retention Rate) x (Return on Equity)
= RR x ROE
11-47
• Breakdown of ROE
ROE=
Net Income Sales Total Assets

= ´ ´
Sales Total Assets Common Equity
Profit Total Asset Financial

= x
Margin Turnover
x Leverage
11-48
• The first operating ratio, net profit margin,

indicates the firm’s profitability on sales
• The second component, total asset turnover is
the indicator of operating efficiency and reflect
the asset and capital requirements of
business.
• The final component measure financial
leverage. It indicates how management has
decided to finance the firm
11-49
• Estimating Growth Based on History

– Historical growth rates of sales, earnings, cash
flow, and dividends
– Three techniques
• Arithmetic or geometric average of annual
percentage changes
• Linear regression models
• Log-linear regression models
– All three use time-series plot of data
11-50
Estimating Dividend Growth
for Foreign Stocks
• The underlying factors that determine the
growth rates for foreign stocks are similar to
those for U.S. stocks
• The value of the equation’s components may
differ substantially due to differences in
accounting practices in different countries
– Retention Rate
– Net Profit Margin
– Total Asset Turnover
– Total Asset/Equity Ratio
11-51
Relative Valuation Techniques
• Is there any other way of valuing an asset?
11-52
Exhibit 11.2
11-53
Why Discounted Cash Flow Approach
• These techniques are obvious choices for

valuation because they are the epitome of how
we describe value—that is, the present value
of expected cash flows
– Dividends: Cost of equity as the discount rate
– Operating cash flow: Weighted Average Cost of
Capital (WACC)
– Free cash flow to equity: Cost of equity as the
discount rate
• Dependent on growth rates and discount rate
11-54
Why Relative Valuation Techniques
• Provides information about how the market is
currently valuing stocks
– aggregate market
– alternative industries
– individual stocks within industries
• No guidance as to whether valuations are
appropriate
– best used when have comparable entities
– aggregate market and company’s industry are not
at a valuation extreme
11-55
Relative Valuation Techniques
• Value can be determined by comparing to
similar stocks based on relative ratios
• Relevant variables include earnings, cash flow,
book value, and sales
• Relative valuation ratios include price/earning;
price/cash flow; price/book value and
price/sales
• The most popular relative valuation technique
is based on price to earnings
11-56
Earnings Multiplier Model
• P/E Ratio: This values the stock based on
expected annual earnings
Price/Earnings Ratio= Earnings Multiplier
Current Market Price

=
Expected 12 - Month Earnings
11-57
• Combining the Constant DDM with the P/E
ratio approach by dividing earnings on both
sides of DDM formula to obtain
Pi D1 / E1
=
E1 k-g
• Thus, the P/E ratio is determined by
– Expected dividend payout ratio
– Required rate of return on the stock (k)
– Expected growth rate of dividends (g)
11-58
Assume the following information for AGE stock (1)
Dividend payout = 50% (2) Required return = 12% (3)
Expected growth = 8% (4) D/E = .50 and the growth
rate, g=.08. What is the stock’s P/E ratio?
.50
P/E = = .50 / .04 = 12.5
.12 - .08
• What if the required rate of return is 13%
.50
P/E = = .50 / .05 = 10.0
.13 - .08
• What if the growth rate is 9%
.50
P/E = = .50 / .03 = 16.7
11-59
.12 - .09
• In the previous example, suppose the current
earnings of $2.00 and the growth rate of 9%.
What would be the estimated stock price?
• Given D/E =0.50; k=0.12; g=0.09
P/E = 16.7
• You would expect E1 to be $2.18
V = 16.7 x $2.18 = $36.41
• Compare this estimated value to market price
to decide if you should invest in it
11-60
The Price-Cash Flow Ratio
• Why Price/CF Ratio
– Companies can manipulate earnings, but Cash-
flow is less prone to manipulation
– Cash-flow is important for fundamental valuation
and in credit analysis
• The Formula
Pt
P / CFi =
CFt +1
where:
P/CFj = the price/cash flow ratio for firm j
Pt = the price of the stock in period t
CFt+1 = expected cash low per share for firm j
11-61
The Price-Book Value Ratio
• Widely used to measure bank values
• Fama and French (1992) study indicated inverse
relationship between P/BV ratios and excess
return for a cross section of stocks
• The Formula
Pt
P / BV j =
BVt +1
where:
P/BVj = the price/book value for firm j
Pt = the end of year stock price for firm j
BVt+1 = the estimated end of year book value per share for firm j
11-62
The Price-Sales Ratio
• Sales is subject to less manipulation than
other financial data
• This ratio varies dramatically by industry
• Relative comparisons using P/S ratio should
be between firms in similar industries
• The Formula
Pt
P/Sj =
St +1
where: P/Sj = the price to sales ratio for Firm j
Pt = the price of the stock in Period t
St+1 = the expected sales per share for Firm j
11-63
Implementing the Relative Valuation
Technique
• First Step: Compare the valuation ratio for a
company to the comparable ratio for the
market, for stock’s industry and to other stocks
in the industry
– Is it similar to these other P/Es
– Is it consistently at a premium or discount
• Second Step: Explain the relationship
– Understand what factors determine the specific
valuation ratio for the stock being valued
– Compare these factors versus the same factors for
the market, industry, and other stocks
11-64
Individual Task for Next Week (Week 4)
• Each student is required to find a journal article related with any topic discussed
in the 1st half of the term
• The journal article has to be different for each student
• Please explain the reason of choosing that article and your understanding
about the article
• Upload the journal article and the explanation on EMAS2 by Wednesday
evening
• Depending on the time availability, each student will explain their journal article
in week 4, 6, and 7
You can download the journal article by accessing:

1. remote.lib.ui.ac.id (login using SSO)
2. www.sciencedirect.com (create an account using your UI email address)
You can type the keywords related with topics in the 1st half of the term and select
journal article that you can discuss
11-65
The Internet Investments Online
• http://www.leadfusion.com
• http://www.lamesko.com/FinCalc
• http://www.numeraire.com
• http://www.moneychimp.com
11-66
Technical Analysis
– Underlying Assumptions
– Advantages of Technical Analysis
Chapter 15
– Challenges to Technical Analysis

– Technical Trading Rules and Indicators
– Technical Analysis of Foreign Markets
– Technical Analysis of Bond Markets
Underlying Assumptions
of Technical Analysis
• The market value of any good or service is
determined solely by the interaction of supply
and demand
• Supply and demand are governed by
numerous factors, both rational and irrational
• Disregarding minor fluctuations, the prices for
individual securities and the overall value of
the market tend to move in trends, which
persist for appreciable lengths of time
15-2
Underlying Assumptions
of Technical Analysis
• Prevailing trends change in reaction to shifts
in supply and demand relationships. These
shifts, no matter why they occur, can be
detected sooner or later in the action of the
market itself
– It shows the process wherein new information
causes a decrease in the equilibrium price for a
security, but the price adjustment is not rapid
15-3
Exhibit 15.1
15-4
Advantages of Technical Analysis
• Technical analysis is not heavily dependent on
financial accounting statements. The
technician contends that there are several
major problems with accounting statements:
– Lack information needed by security analysts
– GAAP allows firms to select reporting procedures,
resulting in difficulty comparing statements from
two firms
– Non-quantifiable factors do not show up in financial
statements
15-5
Advantages of Technical Analysis
• Fundamental analyst must process new
information and quickly determine a new
intrinsic value, but technical analyst merely
has to recognize a movement to a new
equilibrium
• Technicians trade when a move to a new
equilibrium is underway but a fundamental
analyst finds undervalued securities that may
not adjust their prices as quickly
15-6
Challenges to Technical Analysis
• For Assumptions of Technical Analysis
– Empirical tests of Efficient Market Hypothesis
(EMH) show that prices do not move in trends
• For Technical Trading Rules
– The past may not be repeated
– Patterns may become self-fulfilling prophecies
– A successful rule will gain followers and become
less successful
– Rules require a great deal of subjective
judgement
15-7
Technical Trading Rules & Indicators
• The Rationale
– A typical stock price cycle for the market or a stock
goes through a peak and trough as well as trends
– By analyzing the trend patterns (rising trend, flat
trend, declining trend) and the change in trend, a
technical analyst would be able to decide what trade
is needed (Exhibit 15.2)
• Trading Rules
– Contrary-Opinion Rules
– Follow the Smart Money
– Momentum Indicators
– Stock Price and Volume Techniques
15-8
Exhibit 15.2
15-9
Contrary-Opinion Rules
• Many analysts rely on rules developed from
the premise that the majority of investors are
wrong as the market approaches peaks and
troughs
• Technicians try to determine whether investors
are strongly bullish or bearish and then trade
in the opposite direction
• These positions have various indicators
15-10
• Mutual fund cash positions
– Buy when the mutual fund cash position is high,
sell when low
– Assumes that mutual fund managers are poor
judges of market turning points
• Credit balances in brokerage accounts
– Buy when credit balances increase, sell when
credit balances fall
• Investment advisory opinions
– Buy when advisory firms become more bearish
15-11
• OTC versus NYSE volume
– If OTC volume increases relative to NYSE volume,
sell since speculation increases at peaks
• Chicago Board Options Exchange (CBOE)
put/call ratio
– Buy when option purchasers are bearish (when the
put/call ratio increases)
• Futures traders bullish on stock index futures
– Sell when speculators are bullish
15-12
Follow the Smart Money
• While contrary-opinion rules assume that most
investors are not smart, these indicators seek
to follow the path of sophisticated, and
assumed smart, investors
• The Barron’s Confidence Index
– Measures the yield spread between high-grade
bonds and a large cross section of bonds
– Declining (increasing) yield spreads increase
(decrease) this index, and are a bullish (bearish)
indicator
15-13
Follow the Smart Money
• T-Bill - Eurodollar yield spread
– Decreases in this spread indicates greater
confidence, and is a bullish indicator
• Debit balances in brokerage accounts
– Such balances represent buying on margin, which
is assumed to be done by largely sophisticated
investors
– Increases are a bullish signal
15-14
Momentum Indicators
• Breadth of market
– Measures the number of issues increased and the
number of issues declined each day
– The advance–decline index is typically a cumulative
index of net advances or net declines
• Stocks above their 200-day moving average
– The market is considered to be overbought and
subject to a negative correction when more than 80
percent of the stocks are trading above their 200-day
moving average
15-15
Exhibit 15.5
15-16
Stock Price and Volume Techniques
• The Dow Theory
– The oldest technical trading rule
– Stock prices as moving in trends analogous to the
movement of water
– Three types of price movements over time
• Major trends are like tides in the ocean
• Intermediate trends resemble waves
• Short-run movements are like ripples
– Exhibit 15.7 shows the typical bullish pattern
15-17
Exhibit 15.7
15-18
• Importance of Volume
– Technicians watch volume changes along with
price movements as an indicator of changes in
supply and demand
– The technician looks for a price increase on heavy
volume relative to the stock’s normal trading
volume as an indication of bullish activity
– Conversely, a price decline with heavy volume is
considered bearish
– Technicians also use a ratio of upside–downside
volume as an indicator of short-term momentum for
the aggregate stock market
15-19
• Support and Resistance Levels
– A support level is the price range at which the
technician would expect a substantial increase in
the demand for a stock
– A resistance level is the price range at which the
technician would expect an increase in the supply
of stock and a price reversal
– It is also possible to envision a rising trend of
support and resistance levels for a stock
15-20
• Moving Average Lines
– MA lines are meant to reflect the overall trend for
the price series
– The shorter MA line (the 50-day versus 200-day)
reflecting shorter trends
– If prices reverse and break through the moving-
average line from below accompanied by heavy
trading volume, most technicians would consider
this a positive change; and vice verse
– If the 50-day MA line crosses the 200-day MA line
from below on good volume, this would be a bullish
indicator
15-21
Exhibit 15.9
15-22
11-23
• Relative Strength
• Bar Charting
• Candlestick Charts
• Multiple Indicator Charts
• Point-and-figure Charts
• Overall Feel From A Consensus Of Numerous
Technical Indicators
15-24
Relative Strength
11-25
Bar Charting
11-26
Candlestick Charts
11-27
Technical Analysis of Foreign Markets
• When analyzing non-U.S. markets, many
techniques are limited to price and volume
data
• The reason is that the detailed information
available on the U.S. market through the SEC,
the several stock exchanges, and various
investment services is not always available for
other countries
– Foreign stock market series
– Technical analysis of foreign exchange rates
15-28
Technical Analysis of Bond Markets
• These technical analysis techniques for stocks
can also be applied to the bond market
• The theory and rationale for technical analysis
of bonds is the same as for stocks, and many
of the same trading rules are used
• A major difference is that it was generally not
possible to consider the volume of trading of
bonds because most bonds are traded OTC,
where volume was not reported until 2004
15-29
• http://www.mta.org
• http://www.bigcharts.marketwatch.com
• http://www.stockcharts.com
15-30
Week 5
• From 5 stocks that you have chosen before,
please pick 2 stocks.
a. Download the historical data (daily stock
price for five years) of stock prices for the
2 selected stocks
b. Calculate the return
c. Calculate the standard deviation of stock
return
d. Calculate the correlation and covariance of
the 2 stocks
11-31
e. Calculate the portfolio return and risk if the
stocks are equally weighted
An Introduction to
Portfolio Management
– Some Background Assumptions
– Markowitz Portfolio Theory
Chapter 7
Preliminary
• What is portfolio?
• What is the objective of constructing a portfolio?
• What are the factors that need to be considered in
constructing a portfolio?
7-2
Some Background Assumptions
• As an investor, you want to maximize the
returns for a given level of risk.
• Your portfolio includes all of your assets and
liabilities.
• The relationship between the returns for
assets in the portfolio is important.
• A good portfolio is not simply a collection of
individually good investments.
7-3
• Risk Aversion
– Given a choice between two assets with equal
rates of return, risk-averse investors will select the
asset with the lower level of risk
– Evidence
• Many investors purchase insurance for: Life,
Automobile, Health, and Disability Income.
• Yield on bonds increases with risk classifications
from AAA to AA to A, etc.
– Not all Investors are risk averse
• It may depend on the amount of money involved:
Risking small amounts, but insuring large losses
7-4
• Definition of Risk
– Uncertainty: Risk means the uncertainty of future
outcomes.
For instance, the future value of an investment in
Google’s stock is uncertain; so, the investment is
risky.
On the other hand, the purchase of a six-month CD
has a certain future value; the investment is not
risky.
– Probability: Risk is measured by the probability of
an adverse outcome. For instance, there is 40%
chance you will receive a return less than 8%.
7-5
Markowitz Portfolio Theory
• The first to theorize the portfolio construction

• Two important factors that have to be used in
constructing portfolio
7-6
• Main Results
– Quantifies risk
– Derives the expected rate of return for a portfolio
of assets and an expected risk measure
– Shows that the variance of the rate of return is a
meaningful measure of portfolio risk
– Derives the formula for computing the variance of
a portfolio, showing how to effectively diversify a
portfolio
7-7
• Assumptions for Investors
– Consider investments as probability distributions of
expected returns over some holding period
– Maximize one-period expected utility, which
demonstrate diminishing marginal utility of wealth
– Estimate the risk of the portfolio on the basis of the
variability of expected returns
– Base decisions solely on expected return and risk
– Prefer higher returns for a given risk level.
Similarly, for a given level of expected returns,
investors prefer less risk to more risk
7-8
• Using these five assumptions, a single asset
or portfolio of assets is considered to be
efficient if no other asset or portfolio of assets
offers higher expected return with the same (or
lower) risk, or lower risk with the same (or
higher) expected return.
7-9
Risk Measurement
• How to measure risk?
7-10
Alternative Measures of Risk
• Variance or standard deviation of expected
return
• Range of returns
• Returns below expectations
– Semivariance – a measure that only considers
deviations below the mean
– These measures of risk implicitly assume that
investors want to minimize the damage from
returns less than some target rate
7-11
Alternative Measures of Risk
• The Advantages of Using Standard Deviation
of Returns
– This measure is somewhat intuitive
– It is a correct and widely recognized risk measure
– It has been used in most of the theoretical asset
pricing models
7-12
Measuring Rate of Return
• How to measure return?

• Is there any difference between calculating rate of return
for an individual asset and portfolio?
7-13
Expected Rates of Return
• For An Individual Asset
– It is equal to the sum of the potential returns
multiplied with the corresponding probability of the
returns
– See Exhibit 7.1
• For A Portfolio of Investments
– It is equal to the weighted average of the expected
rates of return for the individual investments in the
portfolio
7-14
Exhibit 7.1
7-15
Expected Rates of Return
If you want to construct a portfolio of n risky assets,
what will be the expected rate of return on the
portfolio is you know the expected rates of return on
each individual assets?
– The formula
n
E(R port ) = å W R
i=1 i i
where : W = the percent of the portfolio in asset i
i
E(R ) = the expected rate of return for asset i
i
– See Exhibit 7.2
7-16
Exhibit 7.2
7-17
Calculating the Risk
• Variance
• Standard deviation
7-18
Individual Investment Risk Measure
• Variance
– It is a measure of the variation of possible rates of
return Ri, from the expected rate of return [E(Ri)]
n
Variance (s ) = å [R i - E(R i )] Pi
2 2
i =1
where Pi is the probability of the possible rate

of return, Ri
• Standard Deviation (σ)

– It is simply the square root of the variance
7-19
Individual Investment Risk Measure
Exhibit 7.3
Possible Rate Expected

2 2
of Return (Ri) Return E(Ri) Ri - E(Ri) [Ri - E(Ri)] Pi [Ri - E(Ri)] Pi
0.08 0.103 -0.023 0.0005 0.35 0.000185

0.10 0.103 -0.003 0.0000 0.30 0.000003
0.12 0.103 0.017 0.0003 0.20 0.000058
0.14 0.103 0.037 0.0014 0.15 0.000205
0.000451
Variance (s2) = 0.000451

Standard Deviation ( s ) = 0.021237
7-20
Movement of Assets
• Covariance
• Correlation
7-21
Covariance of Returns
• A measure of the degree to which two
variables “move together” relative to their
individual mean values over time
• For two assets, i and j, the covariance of rates
of return is defined as:
Covij = E{[Ri - E(Ri)] [Rj - E(Rj)]}
• Example
– The Wilshire 5000 Stock Index and Lehman
Brothers Treasury Bond Index during 2007
– See Exhibits 7.4 and 7.7
7-22
Exhibit 7.4
7-23
Exhibit 7.7
7-24
Covariance and Correlation
• The correlation coefficient is obtained by
standardizing (dividing) the covariance by the
product of the individual standard deviations
• Computing correlation from covariance
Cov
r = s s ij
ij i j
r = the correlation coefficient of returns
ij
s i = the standard deviation of R it
s j = the standard deviation of R jt
7-25
Correlation Coefficient
• The coefficient can vary in the range +1 to -1.
• A value of +1 would indicate perfect positive
correlation. This means that returns for the
two assets move together in a positively and
completely linear manner.
• A value of –1 would indicate perfect negative
correlation. This means that the returns for two
assets move together in a completely linear
manner, but in opposite directions.
• See Exhibit 7.8
7-26
Exhibit 7.8
7-27
Standard Deviation of a Portfolio
• How to calculate the standard deviation of a portfolio?
7-28
• The Formula
n 2 2 n n
s port = å w s + å å w w Cov
i=1 i i i=1i=1 i j ij
where :
s port = the standard deviation of the portfolio
Wi = the weights of the individual assets in the portfolio, where
weights are determined by the proportion of value in the portfolio
s i2 = the variance of rates of return for asset i
Cov ij = the covariance between the rates of return for assets i and j,
where Cov ij = rijs is j
7-29
• How is the effect of components on the risk of portfolio?

– Weights?
– Standard deviation of each asset?
– Covariance/correlation?
7-30
• Computations with A Two-Stock Portfolio
– Any asset of a portfolio may be described by two
characteristics:
• The expected rate of return
• The expected standard deviations of returns
– The correlation, measured by covariance, affects
the portfolio standard deviation
– Low correlation reduces portfolio risk while not
affecting the expected return
7-31
• Two Stocks with Different Returns and Risk
Asset E(Ri ) Wi s 2i si
1 .10 .50 .0049 .07
2 .20 .50 .0100 .10
Case Correlation Coefficient Covariance

a +1.00 .0070
b +0.50 .0035
c 0.00 .0000
d -0.50 -.0035
e -1.00 -.0070
7-32
– Assets may differ in expected rates of return and
individual standard deviations
– Negative correlation reduces portfolio risk
– Combining two assets with +1.0 correlation will not
reduce the portfolio standard deviation
– Combining two assets with -1.0 correlation may
reduce the portfolio standard deviation to zero
– See Exhibits 7.10 and 7.12
7-33
Exhibit 7.10
7-34
Exhibit 7.12
7-35
• Constant Correlation with Changing Weights
– Assume the correlation is 0 in the earlier example
and let the weight vary as shown below.
– Portfolio return and risk are (See Exhibit 7.13):
Case W1 W2 E(Ri) E(Fport)

f 0.00 1.00 0.20 0.1000
g 0.20 0.80 0.18 0.0812
h 0.40 0.60 0.16 0.0662
i 0.50 0.50 0.15 0.0610
j 0.60 0.40 0.14 0.0580
k 0.80 0.20 0.12 0.0595
l 1.00 0.00 0.10 0.0700
7-36
Exhibit 7.13
7-37
• A Three-Asset Portfolio
– The results presented earlier for the two-asset
portfolio can be extended to a portfolio of n assets
– As more assets are added to the portfolio, more risk
will be reduced, everything else being the same
– The general computing procedure is still the same,
but the amount of computation has increase rapidly
– For the three-asset portfolio, the computation has
doubled in comparison with the two-asset portfolio
7-38
Are there any estimation issues?
7-39
Estimation Issues
• Results of portfolio allocation depend on
accurate statistical inputs
• Estimates of
– Expected returns
– Standard deviation
– Correlation coefficient
• Among entire set of assets
• With 100 assets, 4,950 correlation estimates
• Estimation risk refers to potential errors
7-40
Estimation Issues
• With the assumption that stock returns can be
described by a single market model, the
number of correlations required reduces to the
number of assets
• Single index market model:
R i = a i + bi R m + e i
bi = the slope coefficient that relates the returns for
security i to the returns for the aggregate market
Rm = the returns for the aggregate stock market
7-41
Estimation Issues
• If all the securities are similarly related to
the market and a bi derived for each one, it
can be shown that the correlation coefficient
between two securities i and j is given as:
s m2
rij = bib j
s is j
2
where s = the variance of returns for the
m
aggregate stock market
7-42
Efficient Frontier
• Is there only one optimal point of portfolio?

• How can we decide which portfolio that we should choose?
7-43
The Efficient Frontier
• The efficient frontier represents that set of
portfolios with the maximum rate of return for
every given level of risk, or the minimum risk
for every level of return
• Efficient frontier are portfolios of investments
rather than individual securities except the
assets with the highest return and the asset
with the lowest risk
• The efficient frontier curves
– Exhibit 7.14 shows the process of deriving the
efficient frontier curve
– Exhibit 7.15 shows the final efficient frontier curve
7-44
Exhibit 7.14
7-45
Exhibit 7.15
7-46
Efficient Frontier and Investor Utility
• An individual investor’s utility curve specifies
the trade-offs he is willing to make between
expected return and risk
• The slope of the efficient frontier curve
decreases steadily as you move upward
• The interactions of these two curves will
determine the particular portfolio selected by
an individual investor
• The optimal portfolio has the highest utility for
a given investor
7-47
Efficient Frontier and Investor Utility
• The optimal lies at the point of tangency
between the efficient frontier and the utility
curve with the highest possible utility
• As shown in Exhibit 7.16, Investor X with the
set of utility curves will achieve the highest
utility by investing the portfolio at X
• As shown in Exhibit 7.16, with a different set of
utility curves, Investor Y will achieve the
highest utility by investing the portfolio at Y
• Which investor is more risk averse?
7-48
Exhibit 7.16
7-49
• http://www.pionlie.com
• http://www.investmentnews.com
• http://www.ibbotson.com
• http://www.styleadvisor.com
• http://www.wagner.com
• http://www.effisols.com
• http://www.efficientfrontier.com
7-50
• Contoh Excel Portofolio
7-51
An Introduction to
Asset Pricing Models
– Capital Market Theory: An Overview
– The Capital Asset Pricing Model
Chapter 8
– Relaxing the Assumptions

– Empirical Tests of the CAPM
– The Market Portfolio: Theory vs. Practice
Capital Market Theory: An Overview
• Capital market theory extends portfolio theory
and develops a model for pricing all risky
assets, while capital asset pricing model
(CAPM) will allow you to determine the
required rate of return for any risky asset
• Four Areas
– Background for Capital Market Theory
– Developing the Capital Market Line
– Risk, Diversification, and the Market Portfolio
– Investing with the CML: An Example
8-2
Background for Capital Market Theory
• Assumptions of Capital Market Theory
– All investors are Markowitz efficient investors who
want to target points on the efficient frontier
– Investors can borrow or lend any amount of money
at the risk-free rate of return (RFR)
– All investors have homogeneous expectations; that
is, they estimate identical probability distributions
for future rates of return
– All investors have the same one-period time
horizon such as one-month, six months, or one
year
8-3
• Assumptions (Continued)
– All investments are infinitely divisible, which means
that it is possible to buy or sell fractional shares of
any asset or portfolio
– There are no taxes or transaction costs involved in
buying or selling assets
– There is no inflation or any change in interest rates,
or inflation is fully anticipated
– Capital markets are in equilibrium, implying that all
investments are properly priced in line with their
risk levels
8-4
• Development of Capital Market Theory
– The major factor that allowed portfolio theory to
develop into capital market theory is the concept of
a risk-free asset
• An asset with zero standard deviation
• Zero correlation with all other risky assets
• Provides the risk-free rate of return (RFR)
• Will lie on the vertical axis of a portfolio graph
8-5
Developing the Capital Market Line
• Covariance with a Risk-Free Asset
– Covariance between two sets of returns is
– Because the returns for the risk free asset are

certain, thus Ri = E(Ri), and Ri - E(Ri) = 0, which means that
the covariance between the risk-free asset and any
risky asset or portfolio will always be zero
– Similarly, the correlation between any risky asset
and the risk-free asset would be zero too since
rRF,i= CovRF, I / σRF σi
8-6
• Combining a Risk-Free Asset with a Risky
Portfolio, M
– Expected return: It is the weighted average of the
two returns
– Standard deviation: Applying the two-asset

standard deviation formula, we will have
Since σRF =0, σport =(1-WRF) σM
8-7
• The Capital Market Line
– With these results, we can develop the risk–return
relationship between E(Rport) and σport
– This relationship holds for every combination of the

risk-free asset with any collection of risky assets
– However, when the risky portfolio, M, is the market
portfolio containing all risky assets held anywhere in
the marketplace, this linear relationship is called the
Capital Market Line (Exhibit 8.1)
8-8
Exhibit 8.1
8-9
• Risk-Return Possibilities with Leverage
– One can attain a higher expected return than is
available at point M
– One can invest along the efficient frontier beyond
point M, such as point D
– With the risk-free asset, one can add leverage to
the portfolio by borrowing money at the risk-free
rate and investing in the risky portfolio at point M to
achieve a point like E
– Clearly, point E dominates point D
– Similarly, one can reduce the investment risk by
lending money at the risk-free asset to reach points
like C (see Exhibit 8.2)
8-10
Exhibit 8.2
8-11
Risk, Diversification & the Market Portfolio
• The Market Portfolio

– Because portfolio M lies at the point of tangency, it
has the highest portfolio possibility line
– Everybody will want to invest in Portfolio M and
borrow or lend to be somewhere on the CML
– It must include ALL RISKY ASSETS
– Since the market is in equilibrium, all assets in this
portfolio are in proportion to their market values
– Because it contains all risky assets, it is a
completely diversified portfolio, which means that all
the unique risk of individual assets (unsystematic
risk) is diversified away
8-12
• Systematic Risk
– Only systematic risk remains in the market portfolio
– Systematic risk is the variability in all risky assets
caused by macroeconomic variables
• Variability in growth of money supply
• Interest rate volatility
• Variability in factors like (1) industrial production (2)
corporate earnings (3) cash flow
– Systematic risk can be measured by the standard
deviation of returns of the market portfolio and can
change over time
8-13
• How to Measure Diversification

– All portfolios on the CML are perfectly positively
correlated with each other and with the completely
diversified market Portfolio M
– That is, a completely diversified portfolio would
have a correlation with the market portfolio of +1.00
– The reason is that complete risk diversification
means the elimination of all the unsystematic or
unique risk and the systematic risk correlates
perfectly with the market portfolio
8-14
• Diversification and the Elimination of

Unsystematic Risk
– The purpose of diversification is to reduce the
standard deviation of the total portfolio
– This assumes that imperfect correlations exist
among securities
– As you add securities, you expect the average
covariance for the portfolio to decline
– How many securities must you add to obtain a
completely diversified portfolio?
– See Exhibit 8.3
8-15
Exhibit 8.3
8-16
• The CML and the Separation Theorem

– The CML leads all investors to invest in the M
portfolio
– Individual investors should differ in position on the
CML depending on risk preferences
– How an investor gets to a point on the CML is
based on financing decisions
– Risk averse investors will lend at the risk-free rate
while investors preferring more risk might borrow
funds at the RFR and invest in the market portfolio
– The investment decision of choosing the point on
CML is separate from the financing decision of
reaching there through either lending or borrowing
8-17
• A Risk Measure for the CML

– The Markowitz portfolio model considers the
average covariance with all other assets
– The only important consideration is the asset’s
covariance with the market portfolio
– Covariance with the market portfolio is the
systematic risk of an asset
– Variance of a risky asset i
Var (Rit)= Var (biRMt)+ Var(ε)
=Systematic Variance + Unsystematic Variance
where bi= slope coefficient for asset i
ε = random error term
8-18
Investing with the CML: An Example
Suppose you have a riskless security at 4% and a market
portfolio with a return of 9% and a standard deviation of
10%. How should you go about investing your money so
that your investment will have a risk level of 15%?
• Portfolio Return
E(Rport)=RFR+σport[(E(RM)-RFR)/σM)
=4%+15%[(9%-4%)/10%]=11.5%
• Money invested in riskless security, wRF
11.5%= wRF (4%) + (1-wRF )(9%) ----> wRF= -0.5
• The investment strategy is to borrow 50% and invest
150% of equity in the market portfolio
8-19
The Capital Asset Pricing Model
• A Conceptual Development of the CAPM
– The existence of a risk-free asset resulted in
deriving a capital market line (CML) that became
the relevant frontier
– However, CML cannot be used to measure the
expected return on an individual asset
– For individual asset (or any portfolio), the relevant
risk measure is the asset’s covariance with the
market portfolio
– That is, for an individual asset i, the relevant risk is
not σi, but rather σi riM, where riM is the correlation
coefficient between the asset and the market
8-20
– Applying the CML using this relevant risk measure
– Let βi=(σi riM) / σM be the asset beta measuring the

relative risk with the market, the systematic risk
– The CAPM indicates what should be the expected
or required rates of return on risky assets
– This helps to value an asset by providing an

appropriate discount rate to use in dividend
valuation models
8-21
• The Security Market Line (SML)
– The SML is a graphical form of the CAPM
– Exhibit 8.5 shows the relationship between the
expected or required rate of return and the
systematic risk on a risky asset
– The expected rate of return of a risk asset is
determined by the RFR plus a risk premium for the
individual asset
– The risk premium is determined by the systematic
risk of the asset (beta) and the prevailing market
risk premium (RM-RFR)
8-22
Exhibit 8.5
8-23
• Determining the Expected Rate of Return
– Risk-free rate is 5% and the market return is 9%
Stock A B C D E
Beta 0.70 1.00 1.15 1.40 -0.30
– Applying
E(RA) = 0.05 + 0.70 (0.09-0.05) = 0.078 = 7.8%
E(RB) = 0.05 + 1.00 (0.09-0.05) = 0.090 = 09.0%
E(RC) = 0.05 + 1.15 (0.09-0.05) = 0.096 = 09.6%
E(RD) = 0.05 + 1.40 (0.09-0.05) = 0.106 = 10.6%
E(RE) = 0.05 + -0.30 (0.09-0.05) = 0.038 = 03.8%
8-24
• Identifying Undervalued & Overvalued Assets
– In equilibrium, all assets and all portfolios of assets
should plot on the SML
– Any security with an estimated return that plots
above the SML is underpriced
– Any security with an estimated return that plots
below the SML is overpriced
– A superior investor must derive value estimates for
assets that are consistently superior to the
consensus market evaluation to earn better
risk-adjusted rates of return than the average
investor
8-25
– Compare the required rate of return to the
estimated rate of return for a specific risky asset
using the SML over a specific investment horizon
to determine if it is an appropriate investment
– Exhibit 8.8 shows A, C and E are underpriced but
B and D are over priced because
Stock Required Return Estimated Return
A 7.8% 8.0%
B 9.0% 6.2%
C 9.6% 15.15%
D 10.6% 5.15%
E 3.8% 6.0%
8-26
Exhibit 8.8
8-27
• Calculating Systematic Risk
– The formula
σi Co ( Ri , RM )
βi = ri =
σM M
v σ2
M
– The characteristic line

• A regression line between the returns to the security (Rit)
over time and the returns (RMt) to the market portfolio
• The slope of the regression line is beta
8-28
Exhibit 8.10
8-29
• The Impact of the Time Interval
– The number of observations and time interval used
in regression vary, causing beta to vary
– There is no “correct” interval for analysis
– Value Line Investment Services (VL) uses weekly
rates of return over five years
– Merrill Lynch, Pierce, Fenner & Smith (ML) uses
monthly return over five years
– The return time interval makes a difference, and its
impact increases as the firm’s size declines
8-30
• The Effect of the Market Proxy
– Theoretically, the market portfolio should include
all U.S. and non-U.S. stocks and bonds, real
estate, coins, stamps, art, antiques, and any other
marketable risky asset from around the world
– Most people use the Standard & Poor’s 500
Composite Index as the proxy due to
• It contains large proportion of the total market value
of U.S. stocks
• It is a value weighted index
– Using a different proxy for the market portfolio will
lead to a different beta value
8-31
Relaxing the Assumptions
• Differential Borrowing and Lending Rates
– When borrowing rate, R b, is higher than RFR, the
SML will be “broken” into two lines
• Zero Beta Model
– Instead of a risk-free rate, a zero-beta portfolio
(uncorrelated with the market portfolio) can be
used to draw the “SML” line
– Since the zero-beta portfolio is likely to have a
higher return than the risk-free rate, this “SML” will
have a less steep slope
8-32
Exhibit 8.12
8-33
Relaxing the Assumptions
• Transaction Costs
– With transactions costs, the SML will be a band of
securities, rather than a straight line
• Heterogeneous Expectations and Planning
Periods
– Heterogeneous expectations will create a set
(band) of lines with a breadth determined by the
divergence of expectations
– The impact of planning periods is similar
• Taxes
– Differential tax rates could cause major differences
in the CML and SML among investors
8-34
Empirical Tests of the CAPM
• Stability of Beta
– Betas for individual stocks are not stable
– Portfolio betas are reasonably stable
– The larger the portfolio of stocks and longer the
period, the more stable the beta of the portfolio
• Comparability of Published Estimates of Beta
– Differences exist
– Hence, consider the return interval used and the
firm’s relative size
8-35
Beta INDF 2007 - 2009
8-36
Empirical Tests of the CAPM
• Relationship between Systematic Risk and
Return
– Effect of Skewness on Relationship
• Investors prefer stocks with high positive skewness
that provide an opportunity for very large returns
– Effect of Size, P/E, and Leverage
• Size, and P/E have an inverse impact on returns after
considering the CAPM. Financial Leverage also
helps explain cross-section of returns
– Effect of Book-to-Market Value
• Fama and French (1992) found the BV/MV ratio to be
a key determinant of returns
8-37
Market Portfolio: Theory vs. Practice
• The true market portfolio should
– Included all the risky assets in the world
– In equilibrium, the assets would be included in the
portfolio in proportion to their market value.
• There is no unanimity about which proxy to
use and different proxies have been used
– An incorrect market proxy will affect both the beta
risk measures and the position and slope of the
SML that is used to evaluate portfolio performance
– Exhibit 8.18 illustrates the impact of time period
and proxies on beta measures
8-38
Exhibit 8.18
8-39
Summary
• The assumption of capital market theory
expand on those of the Markowitz portfolio
model and include consideration of the
risk-free rate of return
• The dominant investment opportunity is the
line tangent to the efficient frontier at the
market portfolio, known as the CML
• Investors can move along the CML by
investing in both risk-free rate and the market
portfolio through either lending or borrowing
8-40
Summary
• The relevant risk measure for an individual
risky asset is its systematic risk or covariance
with the market portfolio
• SML is derived to show the relationship
between the required return and its systematic
risk for any risky asset
• Assuming security markets are not always
completely efficient, you can identify
undervalued and overvalued securities by
comparing your estimate of the rate of return
on an investment to its required rate of return
8-41
Summary
• When we relax several of the major
assumptions of the CAPM, the required
modifications are relatively minor and do not
change the overall concept of the model
• Betas of individual stocks are not stable while
portfolio betas are stable
• There is a controversy about the relationship
between beta and rate of return on stocks
• Changing the proxy for the market portfolio
results in significant differences in betas,
SMLs, and expected returns
8-42
• http://www.valueline.com
• http://www.wsharpe.com
• http://gsb.uchicago.edu/fac/eugene.fama/
• http://www.moneychimp.com
8-43
Efficient Capital Markets

– Why Should Capital Markets Be Efficient
– Alternative Efficient Market Hypotheses
Chapter 6
– Tests and Results of the Hypotheses

– Behavioral Finance
– Implications of Efficient Capital Markets
Why Should the Markets Be Efficient?
• Premises of An Efficient Market
– A large number of competing profit-maximizing
participants analyze and value securities, each
independently of the others
– New information regarding securities comes to the
market in a random fashion
– Profit-maximizing investors adjust security prices
rapidly to reflect the effect of new information
6-2
Why Should the Markets Be Efficient?
• The Results
– Security price changes should be independent and
random
– The security prices that prevail at any time should
be an unbiased reflection of all currently available
information
– In an efficient market, the expected returns implicit
in the current price of a stock should be consistent
with the perceived risk of the stock
6-3
Alternative Efficient Market Hypotheses (EMH)
• Random Walk Hypothesis

– Changes in security prices occur randomly
• Fair Game Model
– Current market price reflect all available
information about a security and the expected
return based upon this price is consistent with
its risk
• Efficient Market Hypothesis (EMH)
– Divided into three sub-hypotheses depending
on the information set involved
6-4
Efficient Market Hypotheses (EMH)
• Weak-Form EMH
– Current prices reflect all security-market historical
information, including the historical sequence of
prices, rates of return, trading volume data, and
other market-generated information
– This implies that past rates of return and other
market data should have no relationship with
future rates of return
– In short, prices reflect all historical information
6-5
• Semistrong-Form EMH
– Current security prices reflect all public
information, including market and non-market
information
– This implies that decisions made on new
information after it is public should not lead to
above-average risk-adjusted profits from those
transactions
– In short, prices reflect all public information
6-6
• Strong-Form EMH
– Stock prices fully reflect all information from public
and private sources
– This implies that no group of investors should be
able to consistently derive above-average risk-
adjusted rates of return
– This assumes perfect markets in which all
information is cost-free and available to everyone
at the same time
– In short, prices reflect all public and private
information
6-7
Tests and Weak-Form EMH
• Statistical Tests of Independence
– Autocorrelation tests
– Runs tests
• Tests of Trading Rules
– Testing constraints
• Use only publicly available data
• Include all transactions costs
• Adjust the results for risk
– Only better-known technical trading rules have
been examined
• Too much subjective interpretation of data
• Almost infinite number of trading rules
6-8
Tests of Weak-Form EMH
– Trading Rules
• Simulations of Specific Trading Rules
– Trades a stock when the price change exceeds a
filter value
– Studies of this trading rule have used a range of
filters from 0.5 percent to 50 percent
– When these trading costs were considered, all the
trading profits turned to losses
• Testing results generally support the weak-
form EMH, but results are not unanimous
6-9
Tests of Semistrong Form EMH
• Studies that have tested Semi-strong Form EMH can
be divided into two sets of studies:
– Return Prediction Studies
• Time series analysis of returns or the cross-section
distribution of returns for individual stocks. If the market is
efficient, individual stock returns shouldn’t be predicted
with past returns or other public information.
– Event Studies
• Event studies that examine how fast stock prices adjust to
specific significant economic events. If the market is
efficient, it would not be possible for investors to
experience superior risk-adjusted returns by investing after
the public announcement and paying normal transaction
costs
6-10
Tests of Semistrong Form EMH
• Adjustment for Market Effects
– Being used for those two tests
– Test results should adjust a security’s rate of return
for the rate of return of the overall market during
the period considered
– Abnormal rate of return
ARit = Rit - Rmt

where:
ARit = abnormal rate of return on security i during period t
Rit = rate of return on security i during period t
Rmt =rate of return on a market index during period t
6-11
Tests of Semi-strong Form EM
- Return Prediction Studies
• Return Prediction Studies – Time Series
– Predict the time series of future rates of return for
individual stocks or the aggregate market using
public information
• Predict Cross-Sectional Returns
– Look for public information regarding individual
stocks that will help predict the cross-sectional
distribution of future risk-adjusted rates of return
– These tests involve a joint hypothesis and are
dependent both on market efficiency and the asset
pricing model used
6-12
Return Prediction Studies
- Time Series
• Time Series Tests for Abnormal Return
– Short-horizon returns have limited results
– Long-horizon returns analysis has been quite
successful based on
• dividend yield (D/P)
• default spread
• term structure spread
– Quarterly earnings reports may yield abnormal
returns due to
• unanticipated earnings change
6-13
- Time Series
• Quarterly Earnings Reports
– Large Standardized Unexpected Earnings (SUEs)
result in abnormal stock price changes, with over
50% of the change happening after the
announcement
– Unexpected earnings can explain up to 80% of
stock drift over a time period
– These results suggest that the earnings surprise is
not instantaneously reflected in security prices
6-14
- Time Series
• The January Anomaly
– Stocks with negative returns during the prior year
had higher returns right after the first of the year
– Tax selling toward the end of the year has been
mentioned as the reason for this phenomenon
– Such a seasonal pattern is inconsistent with the
EMH
– Several studies in foreign markets found abnormal
returns in January, but the results could not be
explained by tax laws.
6-15
- Time Series
• Other Calendar Effects
– All the market’s cumulative advance occurs during
the first half of trading months
– Monday/weekend returns were significantly
negative
– For large firms, the negative Monday effect
occurred before the market opened (it was a
weekend effect), whereas for smaller firms, most of
the negative Monday effect occurred during the day
on Monday (it was a Monday trading effect)
6-16
Predicting Cross-Sectional Returns
• Price-Earnings Ratios
– Low P/E stocks experienced superior risk-adjusted
results relative to the market, whereas high P/E
stocks had significantly inferior risk-adjusted results
– Publicly available P/E ratios possess valuable
information regarding future returns
– This is inconsistent with semistrong efficiency
6-17
• Price-Earnings/Growth Rate (PEG) Ratios
– Studies have hypothesized an inverse relationship
between the PEG ratio and subsequent rates of
return. This is inconsistent with the EMH
– The results are mixed
• Several studies using either monthly or quarterly
rebalancing indicate an anomaly
• In contrast, a study with more realistic annual
rebalancing indicated that no consistent relationship
exists between the PEG ratio and subsequent rates
of return.
6-18
• The Size Effect
– Several studies have examined the impact of size
on the risk-adjusted rates of return
– The studies indicate that risk-adjusted returns for
extended periods indicate that the small firms
consistently experienced significantly larger risk-
adjusted returns than large firms
– Firm size is a major efficient market anomaly
– The small-firm effect is not stable from year to year
6-19
• Neglected Firms and Trading Activity
– Firms divided by number of analysts following a
stock
– Small-firm effect was confirmed
– Neglected firm effect caused by lack of
information and limited institutional interest
– Neglected firm concept applied across size
classes
– Size effect was confirmed, but no significant
difference was found between the mean returns of
the highest and lowest trading activity portfolios
6-20
• Book Value to Market Value Ratio
– Significant positive relationship found between
current values for this ratio and future stock returns
– Results inconsistent with the EMH
– Size and BV/MV dominate other ratios such as E/P
ratio or leverage
– This combination only works during expansive
monetary policy
– See Exhibit 6.1
6-21
Exhibit 6.1
6-22
• Summary
– Firm size has emerged as a major predictor of
future returns
– This is an anomaly in the efficient market literature
– Attempts to explain the size anomaly in terms of
superior risk measurements, transactions costs,
analysts attention, trading activity, and differential
information have not succeeded
6-23
Event Studies
• Stock split studies show that splits do not
result in abnormal gains after the split
announcement, but before
• Initial public offerings seems to be
underpriced by almost 18%, but that varies
over time, and the price is adjusted within one
day after the offering
• Listing of a stock on a national exchange such
as the NYSE may offer some short-term profit
opportunities for investors
6-24
Event Studies
• Stock prices quickly adjust to unexpected
world events and economic news and hence
do not provide opportunities for abnormal
profits
• Announcements of accounting changes are
quickly adjusted for and do not seem to
provide opportunities
• Stock prices rapidly adjust to corporate events
such as mergers and offerings
6-25
Event Studies
• Strong support from numerous event studies
with the exception of exchange listing studies
• In contrast
– Studies on predicting rates of return for a cross-
section of stocks indicates markets are not
semistrong efficient
• Dividend yields, risk premiums, calendar patterns,
and earnings surprises
– This also included cross-sectional predictors such
as size, the BV/MV ratio (when there is expansive
monetary policy), E/P ratios, and neglected firms.
6-26
Tests of Strong-Form EMH
• Strong-form EMH contends that stock prices
fully reflect both public and private
• This implies that no group of investors with
private information will consistently earn
above-average profits
• Testing Groups of Investors
– Corporate insiders
– Stock exchange specialists
– Security analysts
– Professional money managers
6-27
Corporate Insider Trading
• Corporate insiders include major corporate
officers, directors, and owners of 10% or more
of any equity class of securities
• Insiders must report to the SEC each month
on their transactions in the stock of the firm for
which they are insiders
• These insider trades are made public about six
weeks later and allowed to be studied
• Corporate insiders generally experience
above-average profits especially on purchase
transactions
6-28
Corporate Insider Trading
• This implies that many insiders had private
information from which they derived above-
average returns on their company stock
• Public Investors
– After transaction costs, following insider trading will
not be generally profitable for public investors
according to the latest studies
– However, one can increase returns from using
insider trading information by combining it with key
financial ratios and the type of insiders
6-29
Stock Exchange Specialists
• Specialists have monopolistic access to
information about unfilled limit orders
• You would expect specialists to derive above-
average returns from this information
• The data generally supports this expectation
6-30
Security Analysts
• Tests have considered whether it is possible to
identify a set of analysts who have the ability
to select undervalued stocks
• The analysis involves determining whether,
after a stock selection by an analyst is made
known, a significant abnormal return is
available to those who follow their
recommendations
6-31
Security Analysts
• The Value Line Enigma
– Value Line (VL) publishes financial information on
about 1,700 stocks
– The report includes a timing rank from 1 down to 5
– Firms ranked 1 substantially outperform the market
– Firms ranked 5 substantially underperform the
market
– Changes in rankings result in a fast price adjustment
– Some contend that the Value Line effect is merely
the unexpected earnings anomaly due to changes in
rankings from unexpected earnings
6-32
Security Analysts
• Analysts Recommendations
– There is evidence in favor of existence of superior
analysts who apparently possess private
information
– Analysts appear to have both market timing and
stock-picking ability
– Consensus recommendations do not contain
incremental information, but changes in consensus
recommendations are useful.
– The most useful information consisted of upward
earning revision
6-33
Professional Money Managers
• Money Managers
– Trained professionals, working full time at
investment management
– If any investor can achieve above-average returns,
it should be this group
– If any non-insider can obtain inside information, it
would be this group due to the extensive
management interviews that they conduct
6-34
Professional Money Managers
• The Performance
– Most tests examine mutual funds
– New tests also examine trust departments,
insurance companies, and investment advisors
– Risk-adjusted, after expenses, returns of mutual
funds generally show that most funds did not
match aggregate market performance
– See Exhibit 6.3
6-35
Exhibit 6.3
6-36
Behavioral Finance
• It is concerned with the analysis of various
psychological traits of individuals and how
these traits affect the manner in which they act
as investors, analysts, and portfolio managers
• There is no unified theory of behavioral
finance and the emphasis has been on
identifying portfolio anomalies that can be
explained by various psychological traits
6-37
Behavioral Finance
• Explaining Biases
– Prospect Theory
• Contends that utility depends on deviations from
moving reference point rather than absolute wealth
– Overconfidence (confirmation bias)
• Look for information that supports their prior opinions
and decision
– Noise Traders
• Influenced strongly by sentiment, they tend to move
together, which increases the prices and the volatility
– Escalation Bias
• Put more money into a bad investment
6-38
Behavioral Finance
• Fusion Investing
– The integration of two elements of investment
valuation-fundamental value and investor
sentiment
– During some periods, investor sentiment is rather
muted and noise traders are inactive, so that
fundamental valuation dominates market returns
– In other periods, when investor sentiment is
strong, noise traders are very active and market
returns are more heavily impacted by investor
sentiments
6-39
Implications of Efficient Capital Markets
• Overall, the results of many studies indicate

the capital markets are efficient as related to
numerous sets of information
• On the other hand, there are substantial
instances where the market fails to rapidly
adjust to public information
• What are the implications for investors in light
of these mixed evidence?
– Technical Analysis
– Fundamental Analysis
– Portfolio Management
6-40
Technical Analysis
• Assumptions of technical analysis directly
oppose the notion of efficient markets
• Technicians believe that new information is not
immediately available to everyone, but
disseminated from the informed professional
first to the aggressive investing public and
then to the masses
• Technicians also believe that investors do not
analyze information and act immediately
6-41
Technical Analysis
• Stock prices move to a new equilibrium after
the release of new information in a gradual
manner, causing trends in stock price
movements that persist for periods of time
• Technical analysts develop systems to detect
movement to a new equilibrium (breakout) and
trade based on that
• If the capital market is weak-form efficient, a
trading system that depends on past trading
data has no value
6-42
• Fundamental analysts believe that there is a
basic intrinsic value for the aggregate stock
market, various industries, or individual
securities and these values depend on
underlying economic factors
• Investors should determine the intrinsic value
of an investment at a point in time and
compare it to the market price
6-43
• If you can do a superior job of estimating
intrinsic value, you can make superior market
timing decisions and generate above-average
returns
• Intrinsic value analysis involves:
– Aggregate market analysis
– Industry and company analysis
6-44
Aggregate Market Analysis
• EMH implies that examining only past
economic events is not likely to lead to
outperforming a buy-and-hold policy because
the market adjusts rapidly to known economic
events
• Merely using historical data to estimate future
values is not sufficient
• You must estimate the relevant variables that
cause long-run movements
6-45
Industry and Company Analysis
• Wide distribution of returns from different
industries and companies justifies industry and
company analysis
• Must understand the variables that effect rates
of return and
• Do a superior job of estimating future values of
these relevant valuation variables, not just look
at past data
6-46
Industry and Company Analysis
• Important relationship between expected

earnings and actual earnings
• Accurately predicting earnings surprises
• Strong-form EMH indicates likely existence of
superior analysts
• Studies indicate that fundamental analysis
based on E/P ratios, size, and the BV/MV
ratios can lead to differentiating future return
patterns
6-47
Fundamental Analysis Conclusion
• Estimating the relevant variables is as much
an art and a product of hard work as it is a
science
• Successful investor must understand what
variables are relevant to the valuation
processes and have the ability and work ethic
to do a superior job of estimating these
important valuation variables
6-48
Efficient Markets &
• Portfolio Managers with Superior Analysts
– Concentrate efforts in mid-cap stocks that do not
receive the attention given by institutional portfolio
managers to the top-tier stocks
– The market for these neglected stocks may be less
efficient than the market for large well-known
stocks
6-49
Efficient Markets &
• Portfolio Managers without Superior Analysts
– Determine and quantify your client's risk
preferences
– Construct the appropriate portfolio
– Diversify completely on a global basis to eliminate
all unsystematic risk
– Maintain the desired risk level by rebalancing the
portfolio whenever necessary
– Minimize total transaction costs
6-50
Efficient Markets &
• The Rationale and Use of Index Funds and
Exchange-Traded Funds
– Efficient capital markets and a lack of superior
analysts imply that many portfolios should be
managed passively (so their performance matches
the aggregate market, minimizes the costs of
research and trading)
– Institutions created market (index) funds which
duplicate the composition and performance of a
selected index series
6-51
Efficient Markets &
• Insights from Behavioral Finance
– Growth companies will usually not be growth
stocks due to the overconfidence of analysts
regarding future growth rates and valuations
– Notion of “herd mentality” of analysts in stock
recommendations or quarterly earnings estimates
is confirmed
6-52
• http://www.bloomberg.com
• http://news.ft.com
• http://www.online.wsj.com
• http://finance.yahoo.com
• http://money.cnn.com
• http://www.cnbc.com
• http://www.abcnews.com
• http://www.nbcnews.com
• http://www.msnbc.msn.com
6-53
March 04, 2021
Islamic Capital
market
Muhammad Farras
Farhan
Demander Of Funds (Business
Firms, Gov't)
Overview Sistem
Keuangan Flow of Flow of
Financial Loanable
Services, Funds
Incomes, (Savings)
and claims
Supplier of Funds (Households)

Function of Financial System
and Financial Market
1 Saving Function 2 Wealth Function
3 Liquidity Function 4 Credit Function
5 Payment Function 6 Risk Function
7 Policy Function
Direct Finance
(+) Simple
(-) Difficult to Match and tends to be risky
Semi Direct Finance
(+) Lower Search Cost
(-) Difficult to Match and tends to be risky
InDirect Finance
(+) Low Risk and Affordable
(-) Low Returns, "Boring|
Financial Markets
Clasification
Islamic Financial
System
A system in a country’s economy consisting of financial markets, financial institutions,
financial instruments and market participants that operate along with Islamic principles
with the purpose of meeting the Maqasid
(objectives) of Shariah
Function of Islamic Capital
Market
Intermediaries between demanders and

1 Suppliers of fund 2 Complementary to Islamic Banking and Takaful
Provide Opportunities for Diversification and

3 Contributes to economic growth 4 Risks
5 Make Available Various Financial Services 6 Facilitate Liquidity Availability

Islamic Capital Market's Role Copy a sticky Copy a sticky Copy a sticky
note, then type in note, then type in note, then type in
your idea. your idea. your idea.
Alternative to Investment Developing Investment
Fund Gathering
Syariah Principles in ICM
Syariah Principles in ICM
Differences
Differences
Differences
1 Saham Syariah
2 Sukuk
3 Reksadana
Efek Syariah 4 SRIA
5 EBA
6 KIK
Have a great
day ahead.
Thank you for

participating!
farrasfarhan31@gmail.com
PITCH DECK V 1.0
Saham
Syariah
Islamic Capital Market #2
Muhammad Farras Farhan

Saham menurut perspektif Syariat
Islam
Isu Syariah yang berkaitan dengan
transaksi di pasar modal: margin,
short selling, dsb
Saham Syariah Perbedaan antara saham Syariah
dan saham konvensional
Proses business dan financial
screening saham Syariah
Perbandingan dalam penentuan
kriteria dalam financial screening
saham syariah
Saham
Bukti Kepemilikan Perusahaan
Benefits
Category
Forbidden
Transactions
Forbidden
Transactions
Forbidden
Transactions
Forbidden
Transactions
Indeks Harga Saham
Menggambarkan Trend Pergerakan Harga Saham
Manfaat Index
Mengukur sentimen investor
Proxy pasar untuk adjusting risiko
Benchmark untuk evaluasi portofolio
Indeks Harga Saham Syariah
Sistem Screening Efek Syariah
Purifikasi
Suspension
Thanks
+62 821-1345-8900
muhammad.farras72@ui.ac.id
Analisis
Fundamental
Saham
Muhammad Farras
Farhan
01
Macroeconomic
02
Industrial Analysis
Analysis
03 04
Valuation
Business Analysis
Methods
Macroeconomic
Analysis
Analisis makroekonomi yang bertujuan untuk
melihat kondisi perekonomian dari negara yang
dimana perusahaan yang sedang kita analisis
terdapat.
● Consumer Confidence Index

● GDP Growth
● BI 7 Day Repo
● USD/IDR Exchange Rate
● Inflation Rate
● etc.
Hamlet
Story Characters
Despite being red, Venus has a beautiful
Mars is actually a very name and is the
cold place second planet
Industrial Analysis
Analisis industrial/sektoral yang dilakukan pada sektor
perusahaan yang sedang kita analisis
● Consumer Confidence Index (Consumer)
● Soft Commodity Prices (Wheat, CPO, Skim Milk) (Consumer)
● Prime Lending Rate, TD Rate (Banks)
● Nickel Prices, Oil Prices, Gold Prices (Commodity)
Hamlet
Story Characters
Competitive Analysi
Penilaian kekuatan dan kelemahan pesaing saat
dan yang potensial. Analisis ini memberikan kon
strategis ofensif dan defensif untuk mengidentifi
peluang dan ancaman.
● PESTLE (Politic, Economic, Social, Tech, Le

Environment)
● Porter’s 5 Forces
● SWOT analysis
Hamlet
Story Characters
Business Analysis
Analisis yang memperlihatkan keunikan dan
fitur menarik yang terdapat dalam perusahaan
yang kita analisa, dari segi bisnis. Dapat berupa
penjelasan usaha maupun melalui rasio
keuangan.
● Ratio Analysis (PER, PBV, ROE, ROI, DER, TIE, etc.

● Segmented Revenue Growth, Capital Structure, etc
“This is a quote, words full of wisdom
that someone important said and can
make the reader get inspired.”
—William Shakespeare
Ratio Analysis
PER PBV ROE

Menunjukkan informasi tentang Menunjukkan informasi menunjukkan seberapa
harga saham dibandingkan tentang nilai buku suatu besar tingkat keberhasilan
dengan laba per saham emiten perusahaan di dalam
menghasilkan keuntungan
PER = Price/EPS PBV = Price/BVPS
ROE = Net Income/Total
EPS = Net Income/Shares BVPS = Equity/Shares Equity
Outstanding Outstanding
Ratio Analysis
DER Dividend Yield

Kemampuan perusahaan untuk ukuran besarnya dividen
memenuhi kewajiban jangka yang diberikan emiten
panjangnya, biasa disebut juga terhadap harga saham
rasio leverage emiten tersebut di pasaran
DER = Debt (interest DY = DPS/Price

Bearing)/Total Equity
DPS = Dividend/Shares
Outstanding
A picture always
reinforces the concept
Images reveal large amounts
of data, so remember: use an
image instead of a long text
Valuation Analysis
Analisis yang memperlihatkan

intrinsic value dari suatu
perusahaan (nilai wajar)
● Discounted Cash Flow (DCF)

● Dividend Discount Model (DDM)
● Gordon Growth Model (GGM )
● Relative Valuation (RV)
Awesome Words
Hamlet in a couple of graphs
Percentages Evolution
1990 2000 2010
Mercury
33% 36%
Venus
30% Mars
To modify these graphs, click on

them, follow the link, change the
data and paste the new graphs here
Thanks
+6282113458900
farras_farhan
Risk and
Return
CAPM
EMH
Muhammad Farras Farhan
Investment Risk
and Return
● Setiap investor berusaha memaksimalkan
profit mereka
● Risk Aversion : Kecenderungan seseorang
dalam mengambil risiko
● Risk Definition : Uncertainty and Probability
Some Assumptions
Markowitz Portfolio
Theory
● Menghitung Risiko
● Menghitung Expected Return dan Risikonya
● Menunjukkan makna varians dalam risiko
portofolio
● Menghitung bagaimana menjaga tingkat varians
dari portofolio dan secara efektif men
diversifikasi portofolio
Markowitz Portfolio
Theory
● Menganggap investasi adalah probabilitas dari
expected return dalam periode tertentu
● Memaksimalkan expected utility
● Mengestimasi risiko dari variabilitas expected
return
● Keputusan diambil dari analisis expected return
dan risiko
● Memilih return yang lebih tinggi untuk kondisi
risiko tertentu
Expected Return Portfolio
Covariance Correlation
Pergerakan dua variabel secara bersama, dibandingkan dengan Seberapa besar pengaruh antara dua variabel
pergerakan individual variabel terhadap rata-ratanya
Portfolio Standard Deviation
Efficient Frontier
The efficient frontier represents that set of portfolios

with the maximum rate of return for every given level
of risk, or the minimum risk for every level of return
Capital Market Theory
● Semua investor bergerak pada efficient frontier

● Investor bisa meminjam dan meminjamkan uang pada risk-free rate
of return (RFR)
● Investor memiliki ekspektasi yang sama
● Semua investor memiliki satu time horizon
● Tidak ada taxes
● Capital Market dalam kondisi Equilibrium
Developing CML
Developing CML
Risk, Diversification and Market Portfolio
Systematic Risk:
● Hanya risiko sistematik yang terdapat dalam
portofolio
● Risiko sistematis diakibat oleh risiko dari aset
yang terpengaruh oleh faktor makro] in growth of
money supply
● Risiko sistematis dinilai dari standar deviasi
Investing in CML
Capital Asset Pricing Model
CAPM: menggambarkan hubungan antara risiko sistematis dan pengembalian yang diharapkan untuk aset,
khususnya saham. CAPM banyak digunakan di seluruh bagian keuangan untuk menentukan harga sekuritas
berisiko dan menghasilkan pengembalian yang diharapkan untuk aset mengingat risiko aset tersebut dan
biaya modal.
Capital Asset Pricing Model
Efficient Capital Markets
● Random Walk Hypothesis: Changes in security prices occur

randomly
● Fair Game Model: Current market price reflect all available
information about a security and the expected return based
upon this price is consistent with its risk
● Efficient Market Hypothesis (EMH): Divided into three
sub-hypotheses depending on the information set involved
Efficient Markets
Hypothesis
● Weak Form : apabila harga-harga dari saham atau sekuritas mencerminkan

secara penuh (fully reflect) informasi masa lalu. Informasi dikatakan masa lalu
jika informasi tersebut sudah terjadi. Angka-angka di masa lalu tidak dapat
digunakan untuk memprediksi harga sekarang.
● Semi Strong: Pasar dapat dikatakan semistrong jika harga-harga sekuritas

saham mencerminkan informasi-informasi publik, termasuk dari laporan
keuangan dan non-market information
● Strong : Apabila harga di pasar mencerminkan semua informasi hingga

informasi paling private sekalipun
Grazie
Have any questions?
+6282113458900
ISLAMIC CAPITAL
MARKET
TH
8 SESSION
MUHAMMAD
FARRAS FARHAN
SILABUS
▪Sukuk I:
▪ Definisi sukuk
▪ Perbedaan sukuk dan obligasi
▪ Jenis sukuk berdasarkan asset backed dan asset based
▪ Jenis dan struktur sukuk berdasarkan akad
Sukuk II:
• Proses penerbitan sukuk
• Pihak-pihak yang terlibat dalam penerbitan sukuk
• Peran lembaga rating dalam penerbitan sukuk
• Berbagai risiko yang melekat pada sukuk
• Berbagai isu terbaru terkait sukuk
▪ AAOIFI
▪Certificate of equal value
representing undivided shares in
ownership of tangible assets,
usufruct and services or (in the
ownership of) the assets of particular
projects or special investment
activity”
▪ UU SBSN DEFINI
SI
▪“Surat berharga negara yang
diterbitkan berdasarkan prinsip
syariah, sebagai bukti atas bagian
penyertaan terhadap Aset SBSN,
baik dalam mata uang Rupiah
maupun valuta asing”
SUKUK
PERBEDAAN SUKUK,
OBLIGASI DAN
SAHAM
JENIS – JENIS
SUKUK
▪ Asset Backed : Ada True sales
dan transfer kepemilikan aset
ASSET ▪ Asset Based : Hanya hak

performance asset
BACKED & ▪ Risiko kredit pada asset
based sukuk sepenuhnya ada
ASSET BASED pada perusahaan/originator
▪ Risiko kredit pada asset
SUKUK backed sukuk sepenuhnya
berada pada underlying asset
ASSET BACKED &
ASSET BASED
SUKUK...CONT
SUKUK
MURABAHAH
(1)
SUKUK
MURABAHAH
(2)
SUKUK
MURABA
HAH (3)
▪ Sukuk Murabahah : Debt Based
SUKUK Contract
MURABAHAH ▪ * Gaboleh dijual di pasar

sekunder
SUKUK ISTHISNA
▪ Sukuk Isthisna : Debt Based
SUKUK Contract
▪ Dapat di hybrid, misal dengan
ISTHISNA ijarah
▪ Cocok untuk proyek skala besar
SUKUK IJARAH
SUKUK
IJARAH
▪ Paling banyak dipakai
▪ Bisa dijual di pasar sekunder
▪ Info : Di konvensional
banyak yang menggunakan
SUKUK “Piutang” untuk dijadikan
underlying asset. hal ini
IJARAH tidak diperbolehkan
SUKUK SALAM
SUKUK ▪ Tidak ada kepastian
imbal hasil
MUSYAR ▪ Tidak perlu ada jaminan

▪ Ada isu dimana kadang
income dibuat smoothing
AKAH
▪ Tidak ada kepastian imbal hasil
▪ Tidak perlu ada jaminan
▪ Ada isu dimana kadang income dibuat smoothing
SUKUK MUDHARABAH
THANKS!
Any questions?
Email : Muhammad.farras72@ui.ac.id
WA : 082113458900
Islamic Capital
Market
10th & 11th Session

Silabus •Pertemuan 10
• Analisa kasus Sukuk
• 1. Skema Penerbitan
• 2. Akad
• 3. Isu (jika ada)
• 4. Kenapa default (jika ada)
dan solusi
Valuasi Sukuk
• Valuing sukuk with fixed cash flows
• Valuing a basic sukuk Ijarah
• Valuing sukuk ijarah with warrants or embedded options
Memastikan Cashflownya
Valuasi
Sukuk
Cashflow yang digunakan
adalah net cashflow
Apabila ada multiple cash

flow maka harus di present
value-kan per periode
Perhatikan apabila ada
contingent claim
Valuing Sukuk with
Fixed Cash Flows
• Metode 1 :
Seperti Mencari
Bond valuation pada
umumnya. Dimana :
• FxC = bisa dianggap

ujrah
Valuing Sukuk with Fixed • Metode 2* : Dari buku
• FV = Face Value
Cash Flows Cont.. •C = Coupon
•E = Jumlah
hari pada masa cupon
sekarang (lama hari
dalam 1 periode
kupon)
•r = YTM
•t = lama hari
dari last coupon ke
hari transaksi
•T = lama
waktu dari tanggal
transaksi ke tanggal
pembayaran
Caranya sama seperti
melakukan bond
Valuing a valuation untuk periode
pembayaran sewanya
Basic
Sukuk
Ijarah Berbeda saat kita
memvaluasikan nilai jual
pada akhir periode
Penentuan nilai Face Value

pada akhir periode
menggunakan pendekatan
Probabilitas
Jadi ada beberapa sukuk yang
Valuing a sukuk kasih option untuk meng-convert
Ijarah with sukuk mereka jadi saham
embedded
options/warrants
Biasanya pada akhir periode
Model yang digunakan biasanya

adalah Black Scholes Option
Pricing Model (BSOPM).
You can find me at:
Any questions?
Email :
Thanks! Muhammad.farras72@ui.ac.id
WA : 082113458900
Islamic Capital
Market
th
12
Session
Yield, yield curve, dan credit
spreads
Duration dan convexity serta

Silabus kegunaan ukuran tersebut untuk
pengelolaan portfolio sukuk
Strategi aktif dan pasif dalam

pengelolaan portfolio sukuk
Duration
•Duration :
• Tenor Efektif dari sebuah Sukuk/Obligasi
• Penting untuk menganalisa kapan BEP
Value pada investasi
• Pendekatan Duration menggunakan
weighted approach dari cashflow
Duration Formula
Modified duration adalah pengukuran

sensitivitas perubahan harga suatu
obligasi jika terjadi perubahan suku bunga.
Contoh : Hasil Modified Duration sebesar

4.26 tahun diartikan sebagai apabila ada
Kenaikan YTM 1% maka harga obligasi
akan turun sebesar 4.26%, Vice Versa
https://www.bareksa.com/id/pustaka/detail/2346/mod
ified-duration
Convexity
Convexity memiliki persamaan dengan Modified Duration, yakni untuk

mengukur sensitivitas perubahan harga obligasi karena perubahan
suku bunga. Hanya saja, convexity lebih banyak digunakan oleh
praktisi karena keakuratannya dibanding Modified Duration yang
mengasumsikan kenaikan atau penurunan suku bunga akan
berdampak linear terhadap perubahan harga obligasi
https://www.bareksa.com/id/pustaka/detail/2348/con
vexity
Convexity
Sukuk yang memiliki Coupon
Rate lebih tinggi lebih gak
sensitive
Rules dalam sukuk duration
Diantara dua obligasi dengan

Diantara dua obligasi dengan
Zero coupon bond maturity sama, maka obligasi
Coupon rate sama, maturity
durationnya sama dengan yang memberikan coupon
yang lebih Panjang, durasi
maturitynya rate lebih rendah pasti
lebih tnggi (resiko lebh tinggi)
duration lebih tinggi
Fakto2 lain konstan, duration

Duration level of perpetuity
bond lebih tinggi Ketika YTM
adalah (1+y)/y
nya lebih rendah
Thanks!
Any questions?
Islamic Capital Market
13th
Session
Muhammad Farras
Farhan
Silabus
• Definisi reksadana syariah
• Pengukuran kinerja
reksadana syariah dengan
Sharpe Ratio
Treynor Ratio
Jensen-Alpha Ratio
Reksadana • Mutual fund (reksadana),
diciptakan untuk memenuhi
Syariah kebutuhan investor terhadap
portfolio
• Tidak perlu repot secara aktif
melakukan strategi aktif
investasi
• Diwakili oleh seorang
manajer investasi yang
kinerjanya dapat diukur dari
waktu ke waktu
Bentuk Reksadana Syariah
• -> Emiten menerbitkan saham untuk

Reksadana diinvestasikan lagi
Perseroan • Terbuka : Bisa dibeli lagi sahamnya
• Tertutup : Tidak dibeli Kembali
Reksadana
• -> Investor membeli unit penyertaan kepada
Kontrak Investasi manajer investasi
Kolektif
Jenis Reksadana
Reksadana Syariah
Reksadana Syariah pasar Reksadana Syariah Reksadana Syariah saham
campuran -> gabungan
uang -> investasi pada pendapatan tetap -> -> komposisi efek
reksadana saham dan
efek yang jatuh tempo < komposisi efek minimal minimal 80% dalam
pendapatan tetap yang
1 tahun 80% dari surat hutang bentuk saham
komposisinya tidak diatur
Reksadana Syariah
Reksadana Syariah indeks Reksadana Syariah
terproteksi -> pokok Reksadana Syariah
-> profit mengacu pada berbasis efek Syariah luar
pemegang saham dijamin berbasis sukuk
suatu indeks tertentu negeri
100% saat jatuh tempo
Reksadana Syariah
Reksadana Syariah
berbentuk KIK
berbentuk KIK yang unit
penyertaan terbatas
penyertaannya
->diinvestasikan kepada
diperdagangkan di bursa
sector rill, manufaktur dll
Purifikasi Reksadana
syariah
• Nilai aset bersih merupakan jumlah
dari nilai pasar seluruh kas, deposito,
saham, obligasi, maupun efek-efek
lainnya pada reksadana tersebut yang
kemudian dikurangi biaya operasional
reksadana seperti biaya MI, biaya
bank kustodian, dll
Pengukuran
Kinerja
• Sharpe Ratio : Melihat Excess return Reksadana
terhadap risiko reksadana
• Treynor Ratio : Melihat Excess return
terhadap risiko sistemik
• Jensen Alpha : Melihat Tingkat
ekspektasi keuntungan reksadana
Pengukuran Kinerja Reksadana
Any questions?
Thanks!
The Mechanism of Composing
List of Shariah Securities (DES)
in The Indonesian Capital Market
Iggi H. Achsien
President Commissioner of Bank Muamalat Tbk.
The milestones of the Indonesian Islamic stock market
• Islamic mutual funds, 1997
• The Jakarta Islamic Index (JII), 2000
• Fatwa DSN-MUI No. 20 regarding Investment in the Mutual Funds, 2001
• Fatwa DSN-MUI No. 40 regarding Islamic Capital Market, 2003
• The regulations of OJK (previously was BAPEPAM), 2006
• Fatwa DSN-MUI No. 80 regarding The Mechanism of Islamic Stock
Transaction in the Stock Exchange, 2011
• The Indonesian Shariah Stock Index (ISSI), 2011
• Jakarta Islamic Index 70 (JII70), 2018
• Fatwa DSN-MUI No. 124 regarding The Application of Islamic Principles in
The Securities Clearing Mechanism in Indonesia, 2018
• Fatwa DSN-MUI No. 135 regarding Stock, 2020
• Fatwa DSN-MUI No. 138 regarding The Application of Islamic Principles
in The Securities Settlement Mechanism in Indonesia, 2020
• The IDX-MES BUMN 17 Index, 2021
The List of Islamic Securities (DES)
DES is a collection of Islamic securities, which are determined by the
Financial Services Authority (OJK) or issued by other DES Issuing Parties.
In addition to OJK, based on the regulation, there are other parties who are allowed to
become DES issuers, where what is meant by DES Issuing Parties are:
• Parties who have obtained approval from OJK to issue DES;
• Shariah Investment Manager who has met the conditions required to carry out
activities as a DES Issuing Party as stipulated in the POJK; or
• Investment Manager who has a Shariah Investment Management Unit that has met
the conditions required to carry out activities as a DES Issuing Party as stipulated
in the POJK.
source: POJK No. 35 regarding Criteria and Issuance of Sharia Securities List
Two types of Islamic Stocks in Indonesia
1. Stocks that meet the selection criteria of shariah
• Selection is carried out by OJK (together with DSN-MUI and IDX)
• Selection is carried out on newly issued and regularly 2 times annualy
• The selection criteria refer to POJK No. 35 regarding Criteria and Issuance of DES
2. Stocks issued by shariah public companies

• No need for selection
• The regulatory reference is POJK No. 17 regarding Issuance and Requirements for
Islamic Stocks by Shariah Public Companies
• Shariah public companies must meet the following requirements:
a. The company's Articles of Association declare it as a shariah company
b. Approved by General Meeting of Shareholders
c. Have a Shariah Supervisory Board (DPS) that has ASPM (Sharia Capital
Market Expert) certification
sumber: POJK No. 35 tentang Kriteria dan Penerbitan Daftar Efek Syariah
The criteria of Islamic stock selection
business activites financial ratios
do not carry out activities

or businesses that are total interest- total interest income
contrary to shariah based debt and other non-halal
principles & do not compared to income compared to
conduct transactions that total assets of total operating income
are contrary to shariah no more than and other income not
principles in the capital 45% more than 10%
market
Fatwa DSN-MUI No. 135 regarding Stock
• In principle, buying and selling company stocks must be free from riba and other
haram elements, including riba-based debt and/or haram income.
• If the principle cannot be realized, taking into account the general rules of al-balwa
and the rules of al-katsrah wa al-qillah wa al-ghalabah, then it is permissible to
carry out a stock purchase transaction with the following conditions:
a. its business activities do not conflict with shariah principles;
b. total interest-based debt compared to total assets of no more than 45%;
c. total interest income and other non-halal income compared to total operating
income and other income not more than 10%; and,
d. shareholders who apply shariah principles must have a cleansing mechanism of
wealth from elements that are not in accordance with shariah principles.
FATWA FATWA FATWA FATWA
135 80 138 124
stock stock trading stock clearing stock settlement

mechanism mechanism mechanism
the Indonesia Stock Exchange is the first stock exchange in

the world which develop an integrated shariah securities
trading mechanism
Islamic Stock in Indonesia
August 2022 Volume Frequency
Total listed stocks 809
Islamic stocks 766
707
668
50%
619 65%
568
537
492
469
429 424
399
365
331
51%
61%
Number Value
of stock
2016 2017 2018 2019 2020 2021 2022*
Islamic stock indices
IDX-MES
BUMN17
Index
selected selected
• 17 the most liquid islamic state-owned stocks
by OJK by BEI • issued 2021
ISSI JII
DES Indonesia JII70
Islamic Stock Shariah Stock Jakarta Islamic Jakarta Islamic
List Index Indeks 70 Indeks
• all islamic • 70 the most liquid • 30 the most liquid

listed stocks islamic stocks islamic stocks
• issued 2011 • issued 2018 • issued 2000
The mechanism for composing the Islamic
Securities List (DES) is the regulator's effort
to provide guidance on securities that
comply with shariah principles to the market.
Therefore, it can change according to market
developments as long as it does not violate
sharia principles.
Thank You.

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Pasar Modal Islam

Nur Dhani Hendranastiti

§ PMI B: Nur Dhani Hendranastiti/Tika Arundina

Demanders of Flow of loanable funds

!"#$%&' ()"*+, -$./$0$+1 :7)0$+

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ü Simple û Difficult to match & risky

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ü Lower search (information) costs

 903+'25$*7+0#052 – Financial intermediation of

Flow of funds Flow of funds

ü Low risk & affordable

Debt Markets Primary Markets Exchange Markets Money Markets

The !"#$%&!'()$* is for short-term The !"#$%&!'()$*&may be

In ",$#&!'()$*/, financial In the /,"*&!'()$*, assets are traded

:"?$+"*6B"75)+ @'*"3$969"?$+"*6 :"?$+"*6B"75)+

§ Avoiding illegitimate activities

• Providing greater access of resources to

To support growth of Facilitate the

Islamic Law Positive Law

Fatwa Private Law Acts/regulations

Transactions that are not aligned with

•Production, distribution, trade, supplier: • Insider information (insider trading)

Conventional Capital Market Islamic Capital Market

Feature Conventional debt market Islamic debt market

Business Activity No limitation Sharia-compliant business

Use of proceeds No limitation Sharia-compliant

Market exposure Islamic investors are not Wider base of investor

Types of business, products, services, contract, corporate

Market Price Stipulation

Financial Services Authority

Prepare your answer on a power point file, submit on EMAS by next

Prepare your answer on a power point file, submit on EMAS by next

What do the owners need

▪ There are three important issues related with types of corporation:

What are the categories of How can we measure the

▪ Income stocks ▪ Cyclical stocks

How to construct an index? Why do we have shari’ah

▪ Index represents the trend of stock price

▪ Target market and security selection:

▪ To gauge market sentiments or investor confidence in a comprehensive yet concise

What are the examples of How can we implement the

How is the screening

Core Business Screening Financial Screening Shari’ah Stock Index

The main business and Financial structure of

Financial ratio is based DSN MUI’s decision on screening Other consideration →

Do we treat sukuk the No standardization → it does not How about other

▪ Issue 1 → Limited liability dan legal personality

▪ Issue 2 → Joint stock company

▪ Issue 3 → Type of company

Tadlis Front running Misleading info

Ihtikar (hoarding) Pooling interest Cornering

Ghisysy Mark at the close Alternate trade

Ghabn fahisy Insider trading

Bai’ al-ma’dum Short selling

Riba Margin trading

Prepare your answer on a power point file, submit on EMAS2 by next

• What is fundamental analysis in the valuation process?

• What are the components to value an asset?

• Present value of the interest payments

NRFR = [1 + RRFR][1 + E (I)] - 1

Net Income Sales Total Assets

6+'25$*7+0#052 – Direct lending gives rise to direct claims

82(+3+'25$*7+0#052 – Direct lending with the aid of

903+'25$*7+0#052 – Financial intermediation of

In ",$#&!'()$/, financial In the /,"&!'()$*, assets are traded

:"?$+"6B"75)+ @'"3$969"?$+"6 :"?$+"6B"75)+