Application of capital asset pricing model (capm) in analysis of listed retail stocks on the vietnam stock market

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON APPLICATION OF CAPITAL ASSET PRICING MODEL (CAPM) IN ANALYSIS OF LISTED RETAIL STOCKS ON THE VIETNAM STOCK MARKET NGUYEN THI MAI TRANG ID No: 19046117 Intake Supervisor: Dr TRAN THI XUAN ANH September 2020 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014125811411000000 ACKNOWLEDGEMENTS Over a year of pursuing Master of Science in Finance of the University of the West of England, the contents designed for the curriculums as well as the dedicated instructing and tutoring of the teachers helped me to improve a lot of financial knowledge and other soft skills I believe that these knowledge and skills will help me develop myself more and more, especially in the better career in the future First of all, I would like to thank my tutor Dr Tran Thi Xuan Anh who gave me a lot of helpful and wonderful feedbacks, comments and ideas for me to complete my study program Second, I would also like to thank my family, friends and colleagues who have always supported and helped me throughout my study and research Finally, I thank all of the faculty and program staff for supporting me throughout the course EXECUTIVE SUMMARY This dissertation studies knowledges related to CAPM model (Capital Asset Pricing Model), including but not limited to theoretical background of CAPM and its mathematical basis, assumptions, advantages and disadvantages At the same time, this dissertation also delves into the CAPM model's development and expansion over time and through actual studies and researches, as well as summaries of the studies that have been done related to the CAPM model in different countries around the world, especially in Asia and Vietnam This dissertation researches on Vietnam's Stock market in general and the retail industry in particular, analyzing opportunities and challenges for investing in retail stocks in the Vietnamese Stock market This dissertation uses CAPM model to value retail stocks that are listed on the Vietnamese Stock market on both official stock exchanges, HOSE and HNX There are 23 stocks of companies in the retail industry for data and analysis Based on the theories of the CAPM model to calculate, this dissertation shows which stocks are overvalued (8 stock codes) and which stocks are undervalued (15 stock codes) From the evaluation of the value of stocks, the research has selected potential stocks (with selected stock codes) based on the criteria given (having positive return during the period starting from listing to June 30 2020, having positive returns from 2019 to June 30 2020, and is undervalued) to describe how to build an optimal portfolio, based on the lowest level of the risk of portfolio (lowest standard deviation) From the above research content, this dissertation points out limitations of CAPM application in valuation of retail stocks on the Vietnam Stock Market as well as some recommendations learnt from CAPM application in research TABLE OF CONTENTS ACKNOWLEDGEMENTS EXECUTIVE SUMMARY LIST OF GRAPHS LIST OF TABLES ACRONYMS INTRODUCTION Importance of the research topic Purposes of the research topic 10 Research Subject, Scope and Methods 10 Research Structure 11 CHAPTER I: LITERATURE REVIEW 12 1.1 Theoretical background of CAPM and its mathematical basis 12 1.1.1 Overview of the CAPM 12 1.1.2 Assumptions in CAPM 13 1.1.2.1 Assumptions on investors’ attitudes 13 1.1.2.2 Assumptions on capital market 13 1.1.3.1 Market Portfolio (M) 16 1.1.3.2 Risk Premium for Market Portfolio 17 1.1.3.3 Expected Rate of Return of Individual Securities 18 1.1.3.4 Beta Ratio 21 1.1.3.5 Security Market Line 22 1.1.4 Extended CAPM 23 1.1.4.1 CAPM with borrowing restrictions 24 1.1.4.2 CAPM with Zero Beta Ratio 25 1.1.4.3 CAPM with Multiple Investment Terms 27 1.1.4.4 CAPM with Transaction Costs and Taxes 28 1.1.5 Advantages and Disadvantages of CAPM 29 1.1.5.1 Stability of Beta 30 1.1.5.2 Relationship between Expected Rate of Return and Beta 30 1.1.5.3 Effects of Non-normal Distribution 30 1.1.5.4 Unusual Limitations of CAPM application 31 1.1.5.5 Fama and French studies and findings 31 1.1.5.6 Criticism from Researchers of Multi-factor Model 32 1.2 Empirical research 33 SUMMARY OF CHAPTER I 38 CHAPTER II: DATA AND METHODOLOGY 40 2.1 Conditions for the model application 40 2.2 Data and Methodology 41 2.3 Methodology 43 2.3.1 Assessment of retail stocks on the Vietnam stock market 43 2.3.1 Building the Optimal Portfolio 44 SUMMARY OF CHAPTER II 46 CHAPTER III: RESULTS OF APPLICATION OF CAPM IN ANALYSIS OF RETAIL STOCKS ON THE VIETNAM STOCK MARKET 47 3.1 Vietnam Stock Market and Prospect of Retail Stock Investment on the Vietnam Stock Market 47 3.1.1 Overview of the Vietnam Stock Market 47 3.1.2.2 Opportunities and Challenges to Invest in Retail Stocks 55 3.2 Application of CAPM in Analysis of Retail Stocks on the Vietnam Stock Market 59 3.2.1 Database 59 3.2.1.1 Rate of Return 59 3.2.1.2 Standard Deviation 61 3.2.1.3 Coefficient of Variation 62 3.2.2 Estimation of CAPM Parameters 63 3.2.2.1 Risk-free Interest Rate 63 3.2.2.2 Market Portfolio 64 3.2.2.3 Beta Ratio 65 3.2.3 Appliance of CAPM in Retail Stock Valuation 66 3.2.4 Building the Optimal Portfolio 68 3.2.4.1 Stock selection for optimal portfolio 68 3.2.4.2 Building optimal portfolio 71 SUMMARY OF CHAPTER III 74 CHAPTER IV: ASSESSMENT OF CAPM APPLICATION IN ANALYSIS OF RETAIL STOCKS ON THE VIETNAM STOCK MARKET 75 4.1 Limitations of CAPM application in valuation of retail stocks on the Vietnam Stock Market 75 4.1.1 General Limitations of CAPM Application on the Vietnam Stock Market 75 4.1.2 Limitations of CAPM Application in Valuation of Retail Stocks on the Vietnam Stock Market 76 4.1.2.1 Measure of Risk - Standard Deviation 76 4.1.1.2 Market Portfolio 81 4.1.1.3 Beta Ratio 82 4.1.1.4 Other Limitations 82 4.2 Some recommendations learnt from CAPM application in research 83 SUMMARY OF CHAPTER IV 87 CONCLUSIONS 88 REFERENCES 89 LIST OF GRAPHS Graph 1.1: Capital Allocation Line (CAL) and Capital Market Line (CML) Graph 1.2: Stock Market Line (SML) Graph 1.3: Stock Market Line (SML) and Alpha Graph 1.4: Efficient Frontier with different borrowing & lending rates Graph 1.5: Efficient portfolios and zero-beta portfolios Graph 1.6: SML and zero-beta portfolios Graph 1.7: CAPM with transaction costs Graph 3.1: Scale and Growth of Retail Industry in Vietnam Graph 3.2: Proportion of logistic revenue in total retail sales in Vietnam Graph 3.3: The proportion of households in Vietnam Graph 3.4: The proportion of ranges of age in Vietnam Graph 3.5: Median Age of Countries Graph 3.6: Porter’s Five Forces Model of Retail industry in Vietnam Graph 3.7: Standard deviations of retail stocks with positve rate of return Graph 3.8: Coefficient of variation of retail stocks with positve rate of return Graph 3.9: Fluctuation of the VN-Index from 2010 to 2020 Graph 3.10: Beta Ratio of Retail stocks Graph 3.11: The sets of Expected Return and Standard Deviation of Portfolio Graph 4.1: Interest rates of Vietnam 5-year government bonds from 2018 to 30 June, 2020 Graph 4.2: Distribution of the rate of return of Retail stocks LIST OF TABLES Table 2.1: List of stocks in the retail industry of Vietnam for the research Table 3.1: Information and Financial indicators of Retail companies on the Vietnam Stock Exchanges Table 3.2: Year when Retail stocks are listed in Vietnam Stock Exchanges Table 3.3: Average Daily/Annual Rate of Return of Retail stocks Table 3.4: Terms and Conditions of Government Bond Table 3.5: Valuations of Retail stocks Table 3.6: The stocks are selected for the portfolio Table 3.7: Average Daily Return and Standard Deviation of selected stocks Table 3.8: Correlation of selected stocks Table 3.9: Covariance of selected stocks Table 3.10: The sets of Proportion of stocks in the portfolio ACRONYMS CAPM Capital Asset Pricing Model SML Stock Market Line CML Capital market line CAL Capital allocation line M Market portfolio P/E Price/Earning BV Book Value DCF Discounted Cash Flows HOSE Ho Chi Minh Stock Exchange HNX Ha Noi Stock Exchange IT Information Technology GDP Gross Domestic Product CFA Chartered Financial Analyst SD VBMA Standard Deviation Vietnam Bond Market Association SSC State Securities Commission ROE Return on Equity ROA Return on Asset GMM General Method of Moments SIM Single Index Model OTC Over The Counter VSD Vietnam Securities Depository INTRODUCTION Importance of the research topic Along with the current boom of the financial market in general and the stock market in particular, the world has recognized the indispensable role of the financial mathematics in research and decision-making process for investment Financial mathematics has played an important role in modernizing research in the financial and monetary field in general and financial investment in particular The examples are applying financial mathematics through risky business on derivatives market, managing risks in stock market fluctuations, developing and managing portfolios, valuing financial assets, effective market theory, credit rating theory and etc The stock market has experienced unpredictable fluctuations over the past few years, and the strong ups and downs of the market have made investors realize that sentiment- and rumor-based investment poses lots of risks Risk management requires effective tools to assess investment opportunities and help build effective portfolios Investors also need to strictly follow the new investment strategy to seek profits on the market in a sustainable way This is an opportunity for financial mathematics to find a firm foothold both in theoretical and practical research CAPM (Capital Asset Model) was first introduced by Sharpe (1964) and Lintener (1965) nearly 60 years ago It is a typical model for applying financial mathematics to analysis and investment The first success of this model is to show how to assess the risk of capital flows and to estimate the prices and expectations of future gains that investors will achieve when investing in the project This is a