GROUP 1

OPTIMAL
PORTFOLIO
SELECTION
SECURITIES AND PORTFOLIO ANALYSIS
 OUR TEAM

Cindy Nessa Ryo Aditya

Permatasari Asyadiah Pratama
2010631030065 2010631030105 201063103010
 CONTENT
01 DIFFERENCE BETWEEN EFFICIENT AND OPTIMAL PORTFOLIOS

02 DETERMINE THE OPTIMAL PORTFOLIO

03 OPTIMAL PORTFOLIO BASED ON INVESTOR PREFERENCES

04 LOWEST RISK OPTIMAL PORTFOLIO MARKOWITZ MODEL

05 OPTIMAL PORTFOLIO WITH RISK-FREE ASSETS

06 OPTIMAL PORTFOLIO WITH RISK-FREE LOAN SAVINGS

07 CASE STUDY
UNDERSTANDING AND BASICS FOR FORMING AN
OPTIMAL AND EFFICIENT PORTFOLIO

An efficient portfolio is an investment portfolio that is

able to produce the best rate of return at a certain level
of risk
In other words, an investment portfolio can be called
efficient if the investor is able to combine several
investment instrume nts to produce a high rate of return
with as little risk as possible.

Although investors' ta rget in gene ral is to create an efficient

portfolio, in reality an efficient portfolio is not the best
investment portfolio. The best portfolio is not only based on
efficienc y but also based on whether the portfolio is optima l
or not.

An optimal portfolio is a portfolio that contains a good

combination of return and risk.
EFFICIENT
PORTFOLIO
Based on this definition, there are two indic ators that investors nee d to pa y
INDICATOR
attention to when compiling an efficient portfolio, namely:

An investment portfolio is able to provide the greatest rate of return with the same
level of risk
An investment portfolio is able to provide the same level of re turn with the
smallest level of risk
An efficient portfolio is depic ted as a c urve consisting of the x-axis whic h
represents the rate of return and the y-axis which represents the sta ndard deviation
or risk le vel.

Efficient portfolio theory re veals that ba sically a dding investment instruments may
not necessarily increase the expe cted return ratio. This is be cause the ra te of return
and risk of a n investment instrument are directly proportional, or is ofte n refe rred
to as high risk-high return.

Therefore, usua lly to compile an efficient portfolio, inve stors will combine se vera l
investment instrume nts that offer differe nt levels of re turn and risk.
DIFFERENCES BETWEEN
EFFICIENT AND OPTIMAL PORTO

The main difference between efficient and optimal portfolio formation lie s in the
fac tors that influence the calculation. An e fficient portfolio only considers one
fac tor betwe en the rate of return or investment risk.

On the other hand, the optimal portfolio considers two factors at once, namely the
be st level of return with the best level of investment risk.
 DETERMINE THE OPTIMAL
KEY STEPS AND CONCEPTS IN DETERMINING THE OPTIMAL PORTFOLIO:
PORTFOLIO
Efficient Frontier
Diversification Tangent Portfolio
Rebalancing

Investment Horizon
Portfolio Risk Analysis
 DETERMINE THE OPTIMAL
PORTFOLIO
01 02 03 04

OPTIMAL LOWEST RISK OPTIMAL OPTIMAL

PORTFOLIO BASED OPTIMAL PORTFOLIO PORTFOLIO
ON INVESTOR PORTFOLIO WITH RISK- WITH RISK-
PREFERENCES MARKOWITZ FREE ASSETS FREE LOAN
MODEL SAVING
EXAMPLE OF AN
OPTIMAL PORTFOLIO

Mr. Burhan intends to invest a certa in amount of funds in EFF shares. This stock is
predicted to have a risk-free rate of re turn of 10% with a ma rket expected return
va lue of 18%. If the value of i is 1.25, then what is the required ra te of return?
OPTIMAL PORTFOLIO
BASED ON INVESTOR
PREFERENCES
The optimal portfolio based on investor preferences a ssumes that it is only based
on the expected return and risk of the portfolio implicitly which assumes that
investors ha ve the same utility function or are at the point of inte rsection of the
investor's utility with the efficient set. (Jogiyanto, 2000: 193) Each inve stor has a
different risk response. Investors who have a le ss favora ble response to risk might
choose the portfolio at point B. However, other investors may ha ve a different risk
response , so they choose another portfolio as long as the portfolio is an efficient
portfolio that is still in the efficient set. Whic h portfolio an investor will c hoose
de pends on their respec tive utility functions.
OPTIMAL PORTFOLIO
BASED ON THE
MARKOWITZ MODEL
As the name suggests, this optimal portfolio formation method was developed by
Harry Markowitz in 1952 and is also known as modern portfolio the ory. This theory
is based on several a ssumptions, including:

Investme nts a re made in a single period;

There are no costs incurred by investors whe n making tra nsactions;
Investors only consider the level of return (expected return) and risk; And
There are no savings and loans that are re ferre d to as risk-free assets, namely types
of a ssets that have a rate of re turn a nd risk equa l to ze ro.
Basically, forming a portfolio using the Markowitz model is much more complex
and complicated than using the Single Index model.
 OPTIMAL PORTFOLIO
WITH RISK-FREE ASSETS
Definition
• a risk -fre e asset is an asse t who se fut ure rate of retu rn
can b e asce rt ain ed at th at time and is in di cat ed by a
retu rn v ari anc e eq ua l t o zero .
• An ex ampl e o f a risk-free asset is a sh o rt -te rm b on d
issu ed by th e g o vernmen t, such as a Ban k In do ne sia
Ce rti fi cat e (SB I).

• Th is o pt imal po rt fo li o i s th e resu lt of th e i nt erse cti on o f t he

straig h t l in e fro m th e RB R p oi nt wi th t he effi cien t se t
cu rv e. Thi s in te rsect io n po in t M is t he po in t of in te rsect io n
b etween th e effici en t set cu rv e a nd a st rai gh t lin e t ha t h as
th e l arge st an gl e o r slo pe (0 ).
 THE PORTFOLIO SLOPE
The portfolio slope (θP) describes the extent to which portfolio ret urns change i n response t o
changes in the risk (standard deviation) of the portfolio. This slope is one of t he key concept s i n
t he form ation of an optim al port folio with risk-free assets.
The formula to calculate the portfolio slope is as foll ows:

Notation:
θP = Slope of the optimal portfolio
E(RP) = Optim al portfolio expected return
RBR = Return of risk-free assets
σP = Risk (standard deviat ion) of t he opt i m al
portfolio
 EXAMPLE : OPTIMAL PORTFOLIO WITH RISK-FREE
ASSETS
An i nv esto r wan ts t o c rea te a p ortfol io th at mi xe s ri sk -free an d ri sky asset s to ach iev e a n
ex pec ted rate of retu rn o f 1 2 %. Th e c urren t rat e o f ret urn on ri sk-free assets i s 4%. He also want s
to en sure t ha t t he po rt fo li o fo rmed ha s a risk (st and ard d ev iat io n) o f a bo ut 15 %. Wh at is t he slo pe
v alu e (θP) of t he op timal p ortfol io he wan ts to ch oo se ?

ANSWER:
RB R (ri sk-free a sset retu rn ) = 4 %
E(RP) (op ti ma l p ortfol io ex pe cted retu rn ) = 1 2% (as
d esired by th e i nv esto r).
σP (o pti mal po rt fo li o risk ) = 15 %
Substit ut e t hese va lu es in t he fo rmul a:

So, the v alu e o f th e slo pe (θP) o f th e o pt imal po rt fo li o he wan ts t o cho ose is

ab out 0.5 33 3. Th is mean s t hat ev ery ad d iti on al un it o f risk in t he po rt fo li o wil l
result in an add it io nal 0 .53 33 % e xp ecte d ret urn
 OPTIMAL
PORTFOLIO W ITH
RISK-FREE LOAN
SAVINGS
• Trad ition al o ptimal po rtfolios on ly
in clud e risk y assets in the p ortfo lio .
• Risk -free assets are u sed to d etermine
th e op tim al portfolio p ositio n, but are
no t inclu ded as assets in th e portfolio.

PORTFOLIO
 ADVANTAGES OF RISK
FREE ASSETS:

• Option s for Investors:

Ex ample of a Ban k Indonesia C ertificate.

• R isk-Free Asset Variance:

σB R ​= 0.

• C ovarian ce with Risky Assets:

σB R,i = ρBR ,i . σB R . σi = 0.
 SAVINGS AND LOANS:

Investors can include Savings: Buying risk- Lo an: Bo rrowin g fu nd s at

risk-free assets in the free assets and putting a risk -fre e i nt erest rate
(se lling risk -free assets)
portfolio as savings them into an efficient
an d usin g th ese fun ds t o
(lending) or loans portfolio of risky in crease t he prop o rt ion i n
(borrowing). assets. an effici ent p ortfol io of
risky asset s.
CHALLENGE
Returns when buying/selling risk-free assets are generally not the same,
usually returns when borrowing are higher than the risk-free rate of
return.

Investors need to understand how to

optimize portfolios in this situation.
CASE STUDY: INVESTING WITH RISK-FREE SAVINGS AND
LOANS

Background:
Consider an investor who wants to optimize his portfolio.
He has two investment options: XYZ S tock, which has a
high rate of return but also high volatility, and Bank
Indonesia Certificates (S BI), which offers a lower rate of
return, but with very low risk. Investors want to understand
how to include SBI in their portfolio to achieve their goals.
 Investment Data:
• XYZ Stock: Average return of 12% with a standard
deviation of 20%.
• Bank Indonesia Certificate (SBI): Average return
rate of 6% with a standard deviation of 1%.

Investor Objectives:
• Investors want to achieve a portfolio with optimal
returns while minimizing risk.
• He has an amount of capital he wants to invest,
for example, Rp. 1,000,000,000.
 INVESTMENT STEPS:
Portfo lio With o u t SBI
(XY Z Sto ck Risk A ssets) :
• In v esto r s star t b y tr y in g
to ach iev e an o p tim al
p o r tf o lio w ith o n ly X Y Z
sto ck s.
• Fo r m a p o r tf o lio b ased
o n th e r etu r n an d r isk o f
XY Z sh ar es.
U sin g SBI as Sav in g s:
• I n v esto r s d ecid e to
in clu d e SBI as sav in g s.
• Th is p r o v id es a
g u ar an teed r ate o f
r etu r n o f 6 % w ith o u t
r isk ( σBR = 0 ) .
• I n v esto r s d eter min e h o w
mu ch f u n d s w ill b e
allo cated to SBI .
U sin g SBI As Loan :
• I n vesto rs also wan t to
see ho w usin g SBI as a
lo an can imp act th eir
p o rtfo lio .
• With a lo an, inv esto rs
can b orro w at an
in terest rate of 6 % fro m
SBI and ad d mo re fu nd s
in to X YZ shares.
 RESULTS ANALYSIS:

Investors can calculate the optimal portfolio in three scenarios: without SBI, with SBI
as savings, and with SBI as loans.
By using SBI, investors can earn higher returns or reduce risk, depending on allocation
and personal situation.
Conclusion:

This case study illustrates how an investor can utilize risk-free assets, such as Bank
Indonesia Certificates, to achieve his goal of forming an optimal portfolio. With an
understanding of the concept of risk-free savings and loans, investors can make smarter
investment decisions according to their goals and risk tolerance.
THANK GROUP 1

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