PERFORMANCE ANALYSIS

OF SET50 INDEX PORTFOLIO

VERSUS NON SET50 EQUITY PORTFOLIO:
MEASUREING THE IMPORTANCE OF ROE
AND MARKET CAPITALIZATION IN THAI
STOCK MARKET

Panu Chaopricha
20 July 2007
Organization of Presentation

Introduction

 Purpose of the study

 Background of study(& literature review)
 Theoretical framework
 Background of SET, SET50
 Statement of the problem
 Significant of the study
Organization of Presentation

Methodology

 Research questions and hypothesis

 Research design
 Data and time period
 Data collection
 Data analysis method
Organization of Presentation

Analysis and Results

 Portfolio formation
 Data analysis
 Results and findings
Organization of Presentation

Summary

 Discussion of findings
 Confirmation and discovery
 Alternative explanation for findings
 Qualifications
 Recommendations for future research
Introduction
Purpose of the study

To establish relationship between

 Firm characteristics

(1) The status as a member of SET 50 index,

(2) Return on Equity (ROE)

 Portfolio returns
Background of Study

 Investors have been seeking to increase

wealth via stock market for decades

 Large variety of concepts and techniques has

been applied to gain the most out of stock
market.
Background of Study

 Fundamental analysis involves analyzing the

business facts around the company.

 Technical analysis deals with forecasting of

price trends based on historical price
behavior. It is done primarily through the use
of chart.
Background of Study

 In an attempt to predict stock returns,

researchers have studies relationships
between stock returns and each of
 Price-to-Book Value Ratio
 Price-to-Sales Ratio
 Price-Earning Ratio
 Market Capitalization
 Debt-to-Equity Ratio
 Size vs. Stock Return

Author(s) Relationship Remark

Banz (1981) Negative

Basu (1983) Negative

Berk (1995) Negative

Chan and Chen (1991) Negative

Chui and Wei (1998) Negative Except for Taiwan

Dhatt, Kim and Mukherji (1999) Positive Among small stocks universe

Drew, Naughton and Veeraraghavan (2003) Negative Risk-adjusted return

Fama (1991) Negative Especially in January

Fama and French (1998) Negative 11 out of 16 markets.

Gerald et al. (1997) Negative Only during expansive monetary policy

Keim (1983) Negative

Loeb (1991) Negative Small stocks

Reignamum (1982) Negative

 P/BV Ratio vs. Stock Return

Author(s) Relationship Remark

Aggarwal et al. (1992) Negative Stronger in Jan, June and small firms

Black (1993) and MacKinlay (1995) Negative A chance result

Capaul, Rowley and Sharp (1993) Negative Risk-adjusted returns

Chan and Chen (1991) Negative this variable means risky & distressed

Chan, Hamao and Lakonishok (1991) Negative

Strong in developed market, Weak in

Chen and Zhang (1998) Negative growth market

Chui and Wei (1998) Negative Only HK, Korea and Malaysia

Daniel and Tittman (1997) Negative

Debndt and Thaler (1987) Negative

Dhatt, Kim and Mukherji (1999) Negative M2B stronger than PE

Drew, Naughton and Veeraraghavan (2003) Positive Risk-adjusted return

Fama and French (1992) Negative Strongest variable

 P/BV Ratio vs. Stock Return

Author(s) Relationship Remark

Fama and French (1992, 1996) Negative Low P/BV = high risk

Fama and French (1998) Negative 12 out of 13 major markets

Gerald et al. (1997) Negative Only during expansive monetary policy

Gonenc and Karan (2003) Positive

Haugen (1995) Negative

Jacob Levy and Reingamum (1988) Negative

Lakonishok, Shleifer and Vishny (1994) Negative

Loughran (1997) Negative Especially in January

Loughran (1997) No Once January is excluded

Malkiel (1995) Questionable

Roll (1995) Negative Not statistically significant

Rosenberg, Reid and Lanstein (1988) Negative

Stattman (1980) Negative

Price to Sales Ratio
vs. Stock Return

Author(s) Relationship Remark

Dhatt, Kim and Mukherji Price-to-Sale

(1999) Negative Stronger power than P/BV

Barbee, Mukherji and Raines

(1996) Negative
 PE Ratio vs. Stock Return

Author(s) Relationship Remark

Aggarwal, Hiraki and Rao (1990) Negative

Ander (1982) Negative

Basu (1977) Negative

Breen (1978) Negative

Dreman (1980a, 1980b, 1979) Negative

Goff (1979) Negative

When controlled for firm
Reignamum (1981) Almost absent size
DE Ratio vs. Stock Return

Author(s) Relationship Remark

Bhandari (1998) Positive

Theoretical Framework

P/BV - D/E
+
-
Price/Sale
? ROE
- Stock Returns
P/E ?
-
Size + ROE
Market
Capitalization
Earning = Net Profit
Equity

Depends on relationship of variable in the ratio

Theoretical Framework
ROE Stock Return Return on
Investment
Numerator Net Profit Capital gain Return
+Dividend gain
Denominator Equity Purchased price Investment
Background of Stock Exchange
of Thailand
 The official market for Thai Equity Instrument
 First trading on April 30, 1975
 Market capitalization was 5,101 billion Baht
(US$ 142 Billion) in 2006
 518 listed companies categorized under 8
industries and 29 sectors.
Market Capitalization

Graph Unit: Billion USD

Comparison of Market Capitalization

836

358
227
142 129
62
H

P
In
M

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in
o

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a

il
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la

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a

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a

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p

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e
K

n
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ia

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s
Source: Stock Exchange of Thailand
Background of Stock Exchange
of Thailand
Stock Exchange of Thailand
 71% of Thailand GDP

 55% foreign, 12% institutional and 34% local

investors
Background of SET50 Index

SET 50 Index
 A market capitalization-weighted price index

 The SET has been calculating the SET50

Index since August 16, 1995

 In 2006, market capitalization of SET50

companies accounts for 72% of SET market

capitalization
Background of SET50 Index

Purpose of SET50 Index

 to accommodate the issuing of index futures

and options (SET50 Index futures was

launched in April 2006)
 To provide a benchmark of investment in The

Stock Exchange of Thailand.

Statement of the problem

 What types of stocks investors should be

considering?
 Many preferred large market cap, liquid, well-
established. => SET50
 Is investment in SET50 firms fruitful?
 What characteristics have strong predictive
power for stock return?
Significance of the study
 First evidence on new relationships
 Prove on perception SET50 index stocks yield
superior return
 Usage of widely-recognized optimization process
 Frequent rebalancing assumption
 Unbiased use of data
 Realistic adoption period of ROE
 Realistic period of sector classification
 Avoidance of survivorship bias
 Exclusion of low liquidity stocks
 Use of powerful model in creating portfolios
Methodology
Research Questions

1. Is there a difference between returns of

stocks that are listed in SET 50 index and
those that are not?
2. Is there a relationship between company
ROE and stock returns?”
3. If any or both have significant relationship
with stock returns, how differently portfolios
constructed based on single or both of
these variables perform?
Hypothesis

RP denotes Return on portfolio

SET denotes Consisting of SET50 stocks
NON denotes Consisting of non SET50 and
liquid stocks
HI denotes Consisting of stocks with
ROE higher than their sectors’
averages
LO denotes Consisting of stocks with ROE equal
to or lower than their sectors’ averages
Hypothesis 1-2

H1: Non SET50 portfolio does not yield higher

returns than SET50 portfolio.
H0 : RP [NON] ≤ RP [SET]
HA : RP [NON] > RP [SET]

H2: Non SET50 portfolio does not yield lower

returns than SET50 high ROE portfolio.
H0 : RP [NON] ≥ RP [SETHI]
HA : RP [NON] < RP [SETHI]
Hypothesis 3-4

H3: Non SET50 portfolio does not yield higher

returns than SET50 low ROE portfolio.
H0 : RP [NON] ≤ RP [SETLO]
HA : RP [NON] > RP [SETLO]
H4: Non SET50 high ROE portfolio does not
yield higher returns than SET50 portfolio.
H0 : RP [NONHI] ≤ RP [SET]
HA : RP [NONHI] > RP [SET]
Hypothesis 5-6

H5: Non SET50 high ROE portfolio does not

yield higher returns than SET50 high ROE
portfolio.
H0 : RP [NONHI] ≤ RP [SETHI]
HA : RP [NONHI] > RP [SETHI]
H6: Non SET50 high ROE portfolio does not
yield higher returns than SET50 low ROE
portfolio.
H0 : RP [NONHI] ≤ RP [SETLO]
HA : RP [NONHI] > RP [SETLO]
Hypothesis 7-8

H7: Among non SET50 stocks, high ROE

portfolio does not yield higher returns than
low ROE portfolio.
H0 : RP [NONHI] ≤ RP [NONLO]
HA : RP [NONHI] > RP [NONLO]

H8: Non SET50 low ROE portfolio does not

yield returns lower than SET50 portfolio.
H0 : RP [NONLO] ≥ RP [SET]
HA : RP [NONLO] < RP [SET]
Hypothesis 9-10

H9: Non SET50 low ROE portfolio does not

yield returns lower than SET50 low ROE
portfolio.
H0 : RP [NONLO] ≥ RP [SETHI]
HA : RP [NONLO] < RP [SETHI]
H10: Non SET50 low ROE portfolio does not
yield higher returns than SET50 low ROE
portfolio.
H0 : RP [NONLO] ≤ RP [SETLO]
HA : RP [NONLO] > RP [SETLO]
Hypothesis 11-12

H11: Among SET50 stocks, high ROE portfolio

does not yield higher returns than low
ROE portfolio.
H0 : RP [SETHI] ≤ RP [SETLO]
HA : RP [SETHI] > RP [SETLO]
H12: Return of portfolio constructed from
SET50 stocks is not equal to return of
market portfolio.
H0 : RP [SET] ≠ RP [MARKET]
HA : RP [SET] = RP [MARKET]
Hypothesis 13

H13: Return of non SET50 portfolio is not

higher than that of market portfolio.
H0 : RP [NON] ≤ RP [MARKET]
HA : RP [NON] > RP [MARKET]
Research Design

7 Portfolios are created for return comparisons

 SET50 Portfolio
 SET50 High ROE Portfolio
 SET50 Low ROE Portfolio
 Non SET50 Portfolio
 Non SET50 High ROE Portfolio
 Non SET50 Low ROE Portfolio
 Market Portfolio (of which market index is used for
return calculation)
Data and Time Period

Population includes equity stocks in Stock

Exchange of Thailand that existed during 2001
– 2006.
Data collection

Data for stock screening

 Company’s ROE

 Classification of companies under sector

 Sector’s ROE and trading value

Downloaded from http://www.setsmart.com

 SET50 Listings from 2004-2006

Downloaded from http://www.set.or.th/

Example of Setsmart.com
Example of SET.or.th
Data Collection

Data for return calculation

 Daily trading data (open, high, low, close and
volume) from 2001-2006
Purchased from Fundtecon Co., Ltd in form of
MetaStock File (right issues, par changes,
name/symbol changes are taken care of)
 Dividend

Downloaded from http://www.siamfn.com

 Example of MetaStock File
Relative Strength Index (40.7480)
50

MACD (-12.9643) 10
0
-10
-20
89 SET (679.490, 681.140, 672.810, 679.840, -0.51996) 800
790
780
770
760
750
740
730
720
710
700
690
680
670
660
650
640
630
620
610
600
590
580

50000

x100000

mber 2006 February March April May June July August September October November December 2007 February
Example : Data extracted from
MetaStock
Date Open High Low Close Volume
03/01/2001 36.8 36.8 36.2 36.2 58000
04/01/2001 36.6 37 36.6 36.8 231000
05/01/2001 37 39 37 38 876000
08/01/2001 39.8 40.2 39.8 39.8 1328000
09/01/2001 40.2 41.6 40 41 2245000
10/01/2001 41 41.6 38.8 38.8 938000.1
11/01/2001 38.8 39.6 38.8 39 394000
12/01/2001 40 42.2 40 42 1278000
15/01/2001 42 42.2 41.8 42 794000
16/01/2001 41.6 41.6 40.8 41.2 185000
17/01/2001 41.2 42 41.2 41.8 520000
18/01/2001 42.2 42.8 42 42 55000
19/01/2001 42 43.2 42 43.2 1030000
22/01/2001 43 43 42.4 42.6 69000
23/01/2001 43.2 43.2 42.6 42.6 41000
24/01/2001 42.6 43.2 42.6 43 782000
25/01/2001 43.2 44.2 43 43.6 135000
26/01/2001 44 44.4 43 43.4 637000
29/01/2001 43 44.6 42.4 43.4 413000
30/01/2001 43.4 44.2 43.2 44.2 671000
Example of Siamfn.com
Stock Screening

 Data for 20 quarters are downloaded.

Redundant stock names are removed,
leaving 517 unique names.

 Stocks are screened for liquidity.

 Average daily trading over 10 M Baht
 In 4 quarters before investment quarter
Stock Screening

Average daily trading is calculated by

Quarterly Trading Value____

Number of trading days in the quarter
Rationale behind 10 M Threshold

2003 2004 2005 2006

Total Market Daily 18,908.22 20,507.75 16,454.88 16,280.91

trading value (Million
Baht)
No. of stock at year end 407 441 468 488
Average Trading 46.46 46.50 35.16 33.36
value/stock
(Million Baht)
 Investment Quarter 1 Million 5 Million 10 Million 15 million
04Q1 158 107 82 66
04Q2 188 139 106 93
04Q3 184 121 99 92
04Q4 190 124 101 93
05Q1 182 117 94 78
05Q2 184 121 96 79
05Q3 183 119 85 70
05Q4 191 123 89 77
06Q1 197 120 91 69
06Q2 197 120 88 64
06Q3 198 118 82 65
06Q4 205 118 85 66
Average No. of Stocks 188 121 92 76
ROE Screening

ROE of stock is classified as follows.

 Higher than sector’s average = HI

 Lower than or equal to sector’s average = LO

Size Screening

SET50 index listing is used for size screening.

H1 H2

Q1 Q2 Q3 Q4

Announce Announce
listing listing
Return Computation
Daily return of stock is calculated as required by QuantAnalysis
Program for further computation

= P1 – P0 + D1
P0
Where
P1 = close price of the day
P0 = close price of previous trading day
D1 = Cash dividend and proceeds from selling
stock dividends
Note on Dividend

 All dividends are manually adjusted to

reflected relevant par changes.
 Stock dividend is assumed to be sold upon
receipt (using close price).
INSTRUMENT

QuantAnalysis Program
 Upper/lower bound sell limit

 Screening: price strength, CV, Return, Standard

deviation, average Rf-beta, daily volume, dividend

yield
 Optimization: MPT, RAMP, MVP, Equal weights

 Rebalancing frequency: weekly, biweekly, monthly,

bimonthly, quarterly
 Investment Period
QuantAnalysis
Investment parameters
 Upper/lower sell limit = 100%
 Screening : manual screening for SET50, non
SET50, Hi ROE, Low ROE and average daily
trading volume.
 Optimization : Markowitz’s Modern Portfolio
Theory
 Number of observation : 36 months
 Optimization Rebalancing Freq.: monthly
 Investment Rebalancing Freq.: weekly
How it works

Returns of last 36 months

SET50
Determine investment proportion

Liquidity

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

ROE
How it works

Returns of last 36 months

SET50
Determine investment proportion

Liquidity

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

ROE
How it works

Returns of last 36 months

SET50
Determine investment proportion

Liquidity

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

ROE
How it works

Returns of last 36 months

SET50
Determine investment proportion

Liquidity

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

ROE
How it works

Returns of last 36 months

SET50
Determine investment proportion

Liquidity

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

ROE
How it works

Returns of last 36 months

SET50
Determine investment proportion

Liquidity

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

ROE
How it works

 Stocks are screened for each quarter.

 12 quarters X 6 portfolios = 72 stock pools.
 QuantAnalysis uses each stock pool to create
portfolio during each quarter.
 Results of all quarters are compiles to form 3
years results of each portfolio.
Data Analysis Method

Statistics Used

T-test: 2 samples assuming unequal variances

to analyze whether mean difference of each
pair of portfolio returns is significantly different
from 0.
Results and Analysis
QuantAnalysis Output :
ParameterInitial Investment Amount $1,000,000

Portfolio Name NONHI04Q4

Upper Bound Sell Limit 100.00%
Lower Bound Sell Limit 100.00%
C:\Documents and
Settings\THINKPAD
Path and Name of Input Data File
R60\Desktop\SET\For
(Output of DataGrabber Advance)
QuantAnalysis\SET50\NON
HI TEXT\NONHI04Q4.xls
Optimization Methods MPT
# of Observations to Optimize 36

Optimization Rebalancing Freq. Monthly

Market S&P 500
Used Provided MSN Betas No
Risk Free Rate (Rf) 2.50%
Money Market Return (yearly) 2.00%
QuantAnalysis Output :
Parameter
Screening Methods
Price Strength Greater than
----
1.00
From … Days Back 5
Daily Volume Greater than 10,000
Average Volume over ... Days 30
CV Less than 10.0
Return Greater than 0.020
Standard Deviation Less than 0.100
Dividends ($) Greater than 1.00
(Avg-Rf)/Beta Greater than 0.002
TOP …. 15

Month Year
Trading Start Date 10 2004
Rebalance Day Monday
Investment Rebalancing Freq. Weekly
Shift Start Day by X weeks 0
Add Extra Day No
QuantAnalysis Output : Graph
Investment vs Market Return
4.00%

2.00%

0.00%
S-04 S-04 O-04 O-04 O-04 N-04 N-04 N-04 D-04 D-04 D-04 J-05

-2.00%

-4.00%

-6.00%

-8.00%

-10.00%

-12.00%
NONHI04Q4 MARKET
QuantAnalysis Output : Graph
DAILY: Investment vs Market Return
4.00%

2.00%

0.00%
S-04 S-04 O-04 O-04 O-04 N-04 N-04 N-04 D-04 D-04 D-04 J-05

-2.00%

-4.00%

-6.00%

-8.00%

-10.00%

-12.00%
NONHI04Q4
QuantAnalysis Output : Graph
NONHI04Q4 CUMMULATIVE GAIN/LOSS BREAKDOWN
40,000

20,000

00

S-04
-20,000 S-04 O-04 N-04 N-04 D-04 J-05

-40,000

-60,000

-80,000

-100,000

-120,000 Money Market Gains Dividend Gains

Captial Gains/Loss Total Profit/Loss
 QuantAnalysis Output :
Investment Allocation
Number of Oberservations: 36 Number of Investment Periods: 13
Rebalancing Frequency: Monthly Investment Rebalancing Frequency: Weekly
Optimization Method: MPT (Markowitz Modern Portfolio Theory)

Recommendations:
01/10/2004 Initial Investment Proportions: Portfolio without Short Sales

Company Name AH CP7-11 DCC FNS HEMRAJ KCE KTC LPN PICNI PLE SCBL SPALI TNITY
Proportion 9.73% 2.39% 16.20% 2.39% 8.15% 4.99% 1.09% 2.13% 7.71% 8.60% 4.60% 14.43% 11.88%
Return of Portfolio 5.05%
Risk of Portfolio 10.04%

20%
15%
10%
5%
0%
AH CP7-11 DCC FNS HEMRAJ KCE KTC LPN PICNI PLE SCBL SPALI TNITY TRU TUF

Recommendations:
27/12/2004 Final Investment Proportions: Portfolio without Short Sales

Company Name AH BH BLAND CP7-11 DCC FNS JAS KTC MK PICNI SCIB SPALI TNITY
Proportion 7.23% 2.92% 3.11% 4.57% 23.98% 8.19% 0.14% 2.80% 8.31% 5.31% 24.43% 4.98% 4.02%
Return of Portfolio 3.42%
Risk of Portfolio 8.60%

30%
20%
10%
0%
AH BH BLAND CP7-11 DCC FNS JAS KTC MK PICNI SCIB SPALI TNITY
 QuantAnalysis Output : Data
Table
NONHI04Q4 - CUMMULATIVE DATA TABLE
Money
Invest- Dividend Captial Initial Final Total Investmen
Start Date End Date Market STD Dev SP500 SP500
ment Gains Gains/Loss Investment Investment Profit/Loss t
Gains
0 -- 01/10/2004 0.00 0.00 0.00 0 1,000,000 0.00 668.29 0.00% 0.00%
1 01/10/2004 04/10/2004 0.00 0.00 24,248.36 1,000,000 1,024,248 24,248.36 1.37% 679.13 2.42% 1.62%
2 04/10/2004 11/10/2004 0.00 0.00 4,086.58 1,024,248 1,004,087 4,086.58 1.90% 677.93 0.41% 1.44%
3 11/10/2004 18/10/2004 0.00 0.00 -52,004.21 1,004,087 947,996 -52,004.21 1.94% 646.51 -5.20% -3.26%
4 18/10/2004 26/10/2004 0.00 0.00 -60,274.45 947,996 939,726 -60,274.45 2.00% 648.38 -6.03% -2.98%
5 26/10/2004 01/11/2004 0.00 0.00 -100,589.47 939,726 899,411 -100,589.47 1.68% 626.96 -10.06% -6.18%
6 01/11/2004 08/11/2004 0.00 0.00 -82,595.14 899,411 917,405 -82,595.14 2.10% 629.2 -8.26% -5.85%
7 08/11/2004 15/11/2004 0.00 0.00 -75,192.42 917,405 924,808 -75,192.42 1.88% 647.56 -7.52% -3.10%
8 15/11/2004 22/11/2004 0.00 0.00 -71,587.88 924,808 928,412 -71,587.88 1.36% 644.95 -7.16% -3.49%
9 22/11/2004 29/11/2004 0.00 0.00 -28,461.97 928,412 971,538 -28,461.97 1.15% 657.25 -2.85% -1.65%
10 29/11/2004 07/12/2004 0.00 0.00 -32,709.70 971,538 967,290 -32,709.70 1.59% 655.83 -3.27% -1.86%
11 07/12/2004 13/12/2004 0.00 0.00 -45,832.11 967,290 954,168 -45,832.11 1.31% 645.75 -4.58% -3.37%
12 13/12/2004 20/12/2004 0.00 0.00 -10,239.34 954,168 989,761 -10,239.34 1.27% 675.71 -1.02% 1.11%
13 20/12/2004 27/12/2004 0.00 0.00 -22,010.53 989,761 977,989 -22,010.53 0.60% 663.86 -2.20% -0.66%
 Results
SET50 SETHI SETLO NON NONHI NONLO MARKET
Capital Gain -967,113.33 -2,345,567.40 1,047,728.68 -3,526,632.35 -407,431.48 -7,417,194.81
Dividend Gain 682,101.23 1,070,490.95 653,929.37 388,582.32 1,263,186.63 193,562.07
Total Profit -285,012.09 -1,275,076.45 1,701,658.05 -3,138,050.03 855,755.15 -7,223,632.74
Returns -0.19% -0.86% 1.15% -2.12% 0.58% -4.88% 0.18%
Std Dev(%) 5.76% 6.38% 6.89% 8.62% 6.61% 9.29% 5.74%

Average Return SET LO NON HI MKT SET 50 SET HI NON NON LO

SETLO 1.15% 0.2335 0.0950 0.0351 0.0048 0.0002 0.0000
NON HI 0.58% 0.2906 0.1428 0.0288 0.0014 0.0000
MKT 0.18% 0.2884 0.0704 0.0037 0.0000
SET 50 -0.19% 0.1724 0.0123 0.0000
SET HI -0.86% 0.0772 0.0000
NON -2.12% 0.0042
NON LO -4.88%
Conclusion

No Null Hypothesis Results Significant

. at α = 0.05
1 RP [NON] ≤ RP [SET] Do Not Reject Sig.

2 RP [NON] ≥ RP [SETHI] Do Not Reject Not Sig.

3 RP [NON] ≤ RP [SETLO] Do Not Reject Sig.

4 RP [NONHI] ≤ RP [SET] Do Not Reject Not Sig.

Conclusion

No Null Hypothesis Results Significant

. at α = 0.05
5 Reject Sig.
RP [NONHI] ≤ RP [SETHI]

6 Do Not Reject Not Sig.

RP [NONHI] ≤ RP [SETLO]

7 Reject Sig.
RP [NONHI] ≤ RP [NONLO]

8 Reject Sig.
RP [NONLO] ≥ RP [SET]
Conclusion

No Null Hypothesis Results Significant

. at α = 0.05
9 Reject Sig.
RP [NONLO] ≥ RP [SETHI]

10 Do Not Reject Sig.

RP [NONLO] ≤ RP [SETLO]

11 Do Not Reject Sig.

RP [SETHI] ≤ RP [SETLO]

12 Reject Not Sig.

RP [SET] ≠ RP [MARKET]

13 Do Not Reject Sig.

RP [NON] ≤ RP [MARKET]
Conclusion

 SET 50 portfolio yields higher return than non

SET50 portfolio
 Between 2 SET50 portfolios, Low ROE one
performs better than High ROE one.
 Between 2 Non SET50 portfolio High ROE
one performs better than LOW ROE one..
Conclusion

 SET 50 portfolio does not perform differently

from Market.
 Non SET50 Low ROE is the worst performer
Confirmation and Discovery

 Contrary to most of previous findings, size

has positive relationship with stock returns.
 Confirm the finding of Dhatt, Kim and
Mukherji (1999) who found positive
relationship in small stock universe.
Confirmation and Discovery

 For SET50, ROE might mean risk; higher risk

=> higher return
 For Non SET50, ROE might mean growth
potential; high ROE => high return
 High ROE portfolios yields significantly higher
dividend gain than low ROE portfolios. (Both
SET50 and non SET50)
Alternative Explanation

 If SET50 stocks are regarded as index

stocks, in stead of large market cap stocks, it
is consistent with the perception that index
funds usually outperform other types of fund.
 ROE might not be relevant variable since
because of inconsistent results
Qualifications

 There was a major surge in stock index

during 2002-2003. This might distort the
results.
Market Capitalization and Index : Stock Exchange of Market Capitalization

SET index
Thailand mai index

Market Capitalization and Index

Billion Baht
Points (USD 142)
1,400 6,000
1,280.81
5,101
1,200
5,000

1,000
4,000
772.15 668.1 713.73
800 679.84
831.57 3,000
600 481.92
372.69 356.48 2,000
400 303.85
269.19
355.81 193.45
1,000
200

0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Stock Exchange of Thailand

Source : SETSMART as of 29 December 2006
Remarks: SET and MAI
Qualifications

 There was a major surge in stock index

during 2002-2003. This might distort the
results.
 Methodology of this research is different from
others in many aspects, possibly causing
different results.
Qualifications

 Stock Exchange of Thailand as an emerging

market which might not be 100% efficient.
 Many parts of this research are conducted
manually, e.g. data input, cut and paste. It
cannot be guaranteed of error free in spite of
several rechecks.
 Trading commission is not taken into
account, resulting in overstated results.
Qualifications

 Earning as reported in financial statement

can be manipulated. Therefore, one needs to
be careful in using accounting data.
 Dividend data retrieved from
www.siamfn.com (by Atkinson Plc.) need
verification with SET yearly fact book.
Recommendation for future
research
 Covering longer period of study
 Studying index stocks vs. non index stocks in
other markets to see if index stocks has the
same meaning of large market cap.
 Varying rebalancing policies to find which
frequency is optimal. This research tried
monthly rebalancing and found majority of
relationships not significant but in same
direction as reported here (weekly).
Recommendation for future
research
 Varying liquidity criteria as market grows
 Trying different optimization processes, e.g.
equal weights, minimum variance portfolio,
Risk-Adjusted Model-Driven Portfolio.
THANK YOU VERY MUCH
Steps in Screening ROE
Step 1 creating ROE table by company by quarter

03Q3 03Q4 04Q1 04Q1 …… ……. 06Q1 06Q2

Stock 1 XXX XXX XXX XXX XXX XXX XXX XXX

Stock 2 XXX XXX XXX XXX XXX XXX XXX XXX

.… XXX XXX XXXCompany

XXXROE XXX XXX XXX XXX

Stock 517 XXX XXX XXX XXX XXX XXX XXX XXX
Steps in Screening ROE
Step 2 creating Sector table by company by quarter

03Q3 03Q4 04Q1 04Q1 …… ……. 06Q1 06Q2

Stock 1 AGRI AGRI AGRI AGRI AGRI AGRI AGRI AGRI

Stock 2 TECH TECH TECH TECH TECH TECH ICT ICT

… XXX XXX XXXSector Classification

XXX XXX XXX XXX XXX
Stock 517 XXX XXX XXX XXX XXX XXX XXX XXX
Steps in Screening ROE
Step 3 creating ROE table by sector by quarter

03Q3 03Q4 04Q1 04Q1 …… ……. 06Q1 06Q2

Agri XXX XXX XXX XXX XXX XXX XXX XXX

Food XXX XXX XXX XXX XXX XXX XXX XXX
Fashion XXX XXX XXX XXX XXX XXX XXX XXX
Sector’s Average ROE
Home XXX XXX XXX XXX XXX XXX XXX XXX
… XXX XXX XXX XXX XXX XXX XXX XXX
Tech XXX XXX XXX XXX XXX XXX XXX XXX
Steps in Screening ROE
Step 4 using tables created in Step 2 and Step 3 to create
Sector’s average table by company by quarter

03Q3 03Q4 04Q1 04Q1 …… ……. 06Q1 06Q2

Stock 1 XXX XXX XXX XXX XXX XXX XXX XXX

Stock 2 XXX XXX XXX XXX XXX XXX XXX XXX

… XXX XXX XXXSector’sXXX XXX XXX XXX XXX

Average ROE

Stock 517 XXX XXX XXX XXX XXX XXX XXX XXX
Steps in Screening ROE
Step 5 minus all values in table from Step 4 from all
values in table from Step 1

03Q3 03Q4 04Q1 04Q1 …… ……. 06Q1 06Q2

Stock 1 XXX XXX XXX XXX XXX XXX XXX XXX

Stock 2 XXX XXX XXX XXX XXX XXX XXX XXX

… XXX XXX XXXCompany

XXX XXXAverage
ROE - Sector’s XXXROE XXX XXX

Stock 517 XXX XXX XXX XXX XXX XXX XXX XXX
Steps in Screening ROE
Step 6 consider for use in the other quarter

03Q3 03Q4 04Q1 04Q1 …… ……. 06Q1 06Q2

Stock 1 XXX XXX XXX XXX XXX XXX XXX XXX

Stock 2 XXX XXX XXX XXX XXX XXX XXX XXX

… XXX XXX XXXPositive

XXX or Negative
XXX XXX XXX XXX

Stock 517 XXX XXX XXX XXX XXX XXX XXX XXX