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BAI 2009 _ Analysis of Investment Holding-Period, Return, and Risk 1 of 9

ANALYSIS OF INVESTMENT HOLDING-PERIOD, RETURN, AND

RISK

A Dewantoro Marsono and Jenny EV Sinaga

Undergraduate Program of Accounting of ABFI Institute Perbanas,

Jl. Perbanas, Karet Kuningan, Setiabudi, Jakarta 12940-Indonesia

[email protected], [email protected]

ABSTRACT

This study examines the effect of the holding-periods on investment’s risk and return.

Sample of this study is the 50 most active stocks by trading volume. The stocks are listed

in Indonesia Stock Exchange. The variables are constructed following the previous

research conducted by Riyanto, Atmaja, and Coadi (1998), Subrata (2005), Sudana and

janiarit (2000), while the holding periods are defined as: 1-Week, 4-Week, and 12-Week.

There are two main hypotheses, (1) the holding-period do not affect investment stock

returns; (2) the holding-period do not affect investment stock risks. ANOVA and

Multiple Pair Wise Comparison of Means are applied in this study. The empirical

analysis finds that the investment stock returns are significantly affected by the holding-

period, while the investment stock risks are significantly not affected by the holding-

period.

Keywords: investment, holding-period, stock returns, and risks

INTRODUCTION

Theory suggests to minimize risk investors should diversify their securities.

Diversification is a mean by which an investor sets portfolio of their securities rather than

invest just in a single stock. Diversification can improve the quality of return and reduce

the risk of portfolio. Basically there are two type of diversification, (1) across securities

and (2) across time. Weinraub and Kuhlman (1994) find that combining stocks with low

beta variability could not minimizing risk of portfolio, while Kuhlman and Weinraub

(1994) in another research find the difference effect for small portfolios. Elfakhani and

Zaher (1998) find that smaller stocks more risky than larger stocks.

Pandya and Rao (1998); Beck, Goldreyer and D’Antonio (2000); Anastasia, Gunawan

and Wijiyanti (2003) showed that investors used many tools to understand and to

minimize investment risk. Return of investment is the most important for investors; the

problem is how to reduce risk without cost to return. Fischer and Jordan (1995:91) said as

investment holding period increase investors can receive more stable return of their

portfolios. In this term, by holding their portfolio longer, investors can anticipate any

change in stocks prices, which could affect their acceptable return and risk of their

investments.

Riyanto, Atmaja and Coadi (1998); Subrata (2005); Sudana and Janiarti (2000) conducted

research on diversification across time. They found that this type of diversification could

reduce investment risk effectively. In the observation period Riyanto, Atmaja and Coadi

BA1 2009 _ Analysis of Investment Holding Period, Return, and Risk 2 of 9

found diversification across time could reduce risk without decreasing in investment

return. Investors can minimize investment risk by keep their investment longer than

normal holding-period.

This paper studies the implementation of diversification investment across time. It

postulates that by extended the holding-period, investors have enough time to reduce

investment risk. Thus, we examine whether implying diversification across time could

reduce investment risk, what is the impact to the investment return.

LITERATUR REVIEW

Many researches examine the methods of reducing risk in order to maintain

investment return. Kuhlman and Weinraub (1994) focus their research on the effect of

individual stock beta variability on the portfolio beta variability. The result it is

possible to significantly reduce the portfolio beta variability by combining stocks

according to their individual beta standard deviation.

Riyanto, Atmaja and Coadi (1998); Subatra (2005) focus their research on reducing

risk of investment on stock by diversification of holding period. They find that

investment return is increasing as the holding-period is becoming longer, but

statistically test shows that the difference in return is not significant. Riyanto, Atmaja,

Coadi and Subatra indicate that the average standard deviation of investment risk is

reducing as the holding-period is becoming longer. Statistically test on average

standard deviation shows that the difference of standard deviation of investment risk

is significant.

Sudana and Janiarti (2000) focus their research on the effect of portfolio size on

portfolio unsystematic risk. They divide the portfolio into two groups, first, portfolio

consists of stocks from single industry, and the other portfolio consists of stocks from

various industries. They find that in both portfolios, there are no significant effects on

reducing unsystematic risk as the number of stock increasing. While comparing the

effects of portfolio size on level of diversification, they find there is significantly

difference between two portfolios.

RESEARCH METHODOLOGY

Sample of this research is chosen from the 50 Most Active Stocks by Trading Value,

which is listing company in Indonesia Stock Exchange in the 2002-2006 periods.

From those 50 stocks we get only 15 stocks that sequentially included in the 50 Most

Active Stocks by Trading Value during the observation periods. The 15 stocks sample

come from various industry.

The data examine in this research are Indonesia Stock Exchange Index and sample

stocks prices. Those data are group into holding-period: 1-week, 4-week, and 12-

week. Three steps of analysis are implemented. First, calculate the return of market

and stocks in each holding-period group. Second, calculate the variance and standard

deviation of the return in each holding-period group. Third, test the significance of

average return and average risk of investment.

The following calculation equation to find return is applied either for market return

and stocks return:


1

1

−

−∑ −=

t

tt

IHSG

IHSGIHSGmR

where Rm = market return; IHSG = Indonesia Composite Index

o

o

P

PPDIVRi

−+=

11

where Ri = stock return

The reviews of empirical literature show that the diversification strategy to reduce

investment risk is not always give the best return. Putting together, the evidence and

arguments presented above seems to suggest that diversified investments could reduce

risk better than non-diversified investment. Thus for our research we proposed the

following null hypothesis.

H01: there is no significant difference average return amongst holding-period

groups

H02: there is no significant difference average risk amongst holding-period

groups

Those two hypothesis are tested using ANOVA, if the null hypothesis is rejected then

we will use Multiple Pair Wise Comparison of Means test to identify which holding-

period group that difference and how does the relationship is (greater or smaller).

RESEARCH FINDING

Table 1 reports descriptive statistics for each of holding-period group of market

return. In particular, the table shows the market return, variance, and standard

deviation. This evidence suggests that, the longer holding-period market returns tend

to increase, so do the variance and standard deviation accordingly.

Table 1

Return, Variance, and Standard Deviation of IHSG

E (Ri) 1-

Week E (Ri) 4-Week E (Ri) 12-Week IHSG

0.64% 2.62% 7.79%

Variance

Std. Deviation

1-Week 4-Week 12-Week 1-Week 4-Week 12-Week

IHSG

0.0009 0.0040 0.0118 0.0294 0.0630 0.1088

Table 2

Return of Each Stock

STOCK E (Ri) 1-Week E (Ri) 4-Week E (Ri) 12-Week

BNGA 4.01% 14.06% 41.04%

ANTM 1.50% 5.78% 16.13%

UNTR 1.37% 5.71% 19.30%


AALI 1.27% 5.01% 15.25%

INTP 1.10% 4.38% 12.66%

ASII 1.09% 4.56% 13.10%

KLBF 0.98% 4.10% 13.95%

UNVR 0.92% 3.74% 10.28%

PNBN 0.88% 3.48% 12.81%

BBCA 0.82% 3.18% 9.39%

TLKM 0.80% 3.03% 8.59%

INKP 0.76% 2.95% 10.07%

INDF 0.59% 2.35% 7.71%

ISAT 0.40% 1.27% 3.24%

GGRM 0.26% 1.07% 3.14%

TOTAL 16.72% 64.66% 196.67%

Table 2 describes statistics for each holding-period group of stocks return. The

biggest stock return for every group is BNGA (stock of PT.Bank Niaga tbk). Stock

prices of BNGA fluctuation dramatically, in 2004, the prices increases from Rp60 to

Rp400, then for the following years the stock price move around Rp500 to Rp1,020.

GGRM (PT Gudang Garam) stock is the lowest stock return for every group.

Table 3 shows that the biggest variance and standard deviation is stock BNGA and the

lowest is stock UNVR (PT Unilever tbk). The rank of stock risk is difference than in

table 2 (stock return) except for stock BNGA, this indicates that extremes fluctuation

of stock price cause high-risk investment.

Table 3

Variance and Standard Deviation

Variance Standard Deviation Stock


BNGA 29.40% 87.73% 212.83% 54.22% 93.66% 145.89%

ANTM 0.81% 2.86% 6.15% 8.99% 16.92% 24.79%

INKP 0.66% 2.68% 13.08% 8.11% 16.38% 36.17%

KLBF 0.65% 3.06% 15.62% 8.07% 17.49% 39.52%

PNBN 0.63% 2.95% 16.14% 7.95% 17.18% 40.18%

INTP 0.55% 2.05% 6.61% 7.42% 14.32% 25.71%

ISAT 0.52% 2.01% 6.65% 7.24% 14.17% 25.79%

UNTR 0.45% 2.00% 8.90% 6.72% 14.16% 29.84%

ASII 0.44% 2.06% 5.88% 6.60% 14.34% 24.25%

TLKM 0.40% 1.38% 3.13% 6.32% 11.76% 17.69%

INDF 0.39% 1.49% 5.40% 6.25% 12.19% 23.24%


BBCA 0.39% 1.25% 3.79% 6.23% 11.18% 19.47%

AALI 0.34% 1.36% 4.55% 5.82% 11.65% 21.33%

GGRM 0.24% 0.98% 2.57% 4.89% 9.89% 16.02%

UNVR 0.17% 0.68% 1.87% 4.17% 8.25% 13.68%

TOTAL 36.03% 114.54% 313.17% 148.98% 283.55% 503.56%

To test the consistency of the finding in previous statistic tests, we then annualized

each market return and stocks return according to their holding-period terms. For

holding-period 1-week, the returns are times 52/1; 4-week group the returns are times

52/4; the last group the returns are times 52/12. Table 4 describes that average market

return in-group 2 is the highest amongst group. The result contrary to the previous test

that shows the longer holding-period the biggest return of investment. The result is

quite the same for risk of market return. This indicates that holding-period does not

effect on return of investment, neither on risk of investment

Table 4

Annualized Return, Variance, and Standard Deviation of IHSG

E (Ri) 1-

Week E (Ri) 4-Week E (Ri) 12-Week IHSG

33.46% 34.09% 33.76%

Variance

Std. Deviation


IHSG

4.49% 5.16% 5.13% 21.18% 22.71% 22.65%

Table 5

Annualized Return of each Stocks

STOCK E (Ri) 1-Week E (Ri) 4-Week E (Ri) 12-Week

BNGA 208.37% 182.77% 177.82%

ANTM 77.75% 75.15% 69.90%

UNTR 71.31% 74.19% 83.65%

AALI 66.25% 65.07% 66.10%

INTP 57.19% 57.00% 54.88%

ASII 56.77% 59.31% 56.77%

KLBF 50.72% 53.33% 60.46%

UNVR 47.94% 48.59% 44.53%

PNBN 45.52% 45.22% 55.50%

BBCA 42.51% 41.36% 40.68%

TLKM 41.37% 39.40% 37.23%

INKP 39.27% 38.38% 43.63%

INDF 30.43% 30.52% 33.41%

ISAT 20.78% 16.45% 14.05%

GGRM 13.57% 13.88% 13.61%

TOTAL 869.77% 840.63% 852.23%

Table 5 describes that all sample stock have unique pattern of return as the holding-

period increasing. This finding is difference than previous analysis (table 2) where all

sample stock shows the same pattern of increasing return according to holding-period

term. For example, although stock BNGA is still the highest return among holding-


period groups but it has decreasing return as the holding-period increasing. In table 6

shows that almost all sample stock has difference pattern of risk as the holding-period

increase. In another words, diversification across time (holding-period) does not effect

on investment return nor investment risk. By employing statistic test with α 5%, we

find there is no significance difference investment risk among holding-period group.

Those evidences indicate that, contrary to the previous research finding by Riyanto,

Atmaja, and Coadi (1998), diversification across time can reduce investment risk

without hampering return, and the longer holding-period the lowest investment risk.

Table 6

Variance and Standard Deviation

Variance Standard Deviation Stock


BNGA 1528.54% 1140.45% 922.28% 390.97% 337.71% 303.69%

ANTM 42.00% 37.24% 26.63% 64.81% 61.02% 51.61%

INKP 34.19% 34.89% 56.68% 58.47% 59.07% 75.28%

KLBF 33.84% 39.77% 67.68% 58.17% 63.06% 82.27%

PNBN 32.82% 38.35% 69.95% 57.29% 61.93% 83.64%

INTP 28.62% 26.64% 28.64% 53.50% 51.62% 53.52%

ISAT 27.26% 26.10% 28.81% 52.21% 51.09% 53.68%

UNTR 23.45% 26.06% 38.58% 48.43% 51.05% 62.11%

ASII 22.64% 26.75% 25.49% 47.58% 51.72% 50.49%

TLKM 20.76% 17.98% 13.56% 45.57% 42.40% 36.83%

INDF 20.34% 19.33% 23.40% 45.10% 43.96% 48.38%

BBCA 20.17% 16.23% 16.43% 44.92% 40.29% 40.53%

AALI 17.61% 17.64% 19.71% 41.97% 42.00% 44.40%

GGRM 12.43% 12.72% 11.12% 35.26% 35.66% 33.35%

UNVR 9.05% 8.86% 8.11% 30.09% 29.76% 28.48%

TOTAL 1873.74% 1489.01% 1357.08% 1074.32% 1022.34% 1048.24%

Table 7 shows Analysis of Variance (ANOVA) is conducted to test the null

hypothesis: there is no significant difference average return amongst holding-period

groups.

Table 7

Analysis Of Variance – Return

Sample Return of 15 stocks

Sum of Squares Df Mean Square F Sig.

Between Groups

Within Groups

Total

.307

1.808

2.115

2

340

342

.153

.005

28.843

.000


The F value is 28.843 at significant level 0.000; while F table at 5% significant level

is 3.0223 those data indicate that null hypothesis is rejected. Since we find that

average returns in each holding-period group (1-Week, 4-Week, 12-Week) is

significantly difference, and then we continue test the 342 data by setting up some

hypothesis which is comparing average stock return in each holding-period group

with another group.

The hypothesis is testing by Multiple Pair Wise Comparisons (MPWC) method. The

purpose of the test is to identify the difference average return amongst the holding-

period groups. The MPWC test result is depicting in table 8. At 5% significant level,

we find that there is significantly difference average return in 1-week holding-period

group comparing to 4-week holding-period group. While comparing 1-Week holding-

period group to 12-Week holding-period group we find that there is significantly

difference average return. The comparison of 4-Week holding-period group to 12-

Week holding-period group reveals that there is significantly difference average

return.

Table 8

Multiple Comparisons

95% Confidence

Interval

(I) Holding-

Period

(J)

Holding-

Period

Mean

Difference

(I-J)

Std. Error

Sig.

Lower

Bound

Upper

Bound

1-Week

4-Week

12-Week

4- Week

12 -Week

1-Week 12-Week

1-Week

4-Week

-.0319585(*)

-.1199619(*)

.0319585(*) -.0880034(*)

.1199619(*)

.0880034(*)

0.0101845

0.0165499

0.0101845 0.0183409

0.0165499

0.0183409

0.005

0.00

0.005 0.00

0.00

0.00

-0.055933

-0.158921

0.007984 -0.131178

0.081003

0.044828

-0.007984

-0.081003

0.055933 -0.044828

0.158921

0.131178

* The mean difference is significant at the .05 levels.

Table 9 shows that the second null hypothesis is tested by ANOVA. The hypothesis:

there is no significant difference average risk amongst holding-period groups. The test

find that F value at 0.371 significant levels is 0.995 while F table at 5% significant

level is 3.0224, since F value is smaller than F table then the null hypothesis is

accepted. This result indicates that there is no significantly difference average risk

amongst holding-period groups. Since there is no difference on average risk, and then

we do not need to do Multiple Comparison.

Table 9

Analysis Of Variance – Risk Sample Risk of 15stocks

Sum of Squares df Mean Square F Sig.

Between Groups

Within Groups

Total

0.002

0.392

0.394

2

339

341

0.001

0.001

0.995

0.371

We find that by annualized the stock return within holding-period groups average

return for each group is: 57.985%, 56.042%, 56.815% respectively. These results


indicate that holding-period in short or long term has not significant effect on

investment return in yearly basis.

By annualized the stock risk within holding-period groups, 4-Week holding-period

shows the lowest average risk amongst other groups. However, when we test those

data with ANOVA at 5% significant level, we discover that no significant difference

risk amongst holding-period groups. Again this result point out that any holding-

period strategy has not effect on investment risk in yearly basis.

Finally, this research find out that the results are opposing the research finding

conducting by Riyanto, Atmaja, and Coadi (1998), and Subrata (2005). The extreme

divergent on stock return and stock risk could be the most factors that create the

difference between two research findings. The other factors could be the macro

economy condition, inflation rate, interest rate, taxation, and industrial trend.

CONCLUSION

This research examines the postulation that investor can reduce investment risk

through diversification across time. In particular, the main question is whether the

diversification across time recorded in the previous empirical literature can be

consistently to reduce investment risk.

The sample data is divided into two categories: market return and stock return. Market

return and stock return indicate the similar pattern with previous research study. The

investment returns increase as the holding period increase accordingly.

The holding-period strategy fail to provide evidence that diversification across time

can reduce investment risk significantly.

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