COMPILING AN OPTIMAL PORTFOLIO USING SINGLE INDEX MODELS IN THE INDONESIAN CAPITAL MARKET

Abstract

Investors' financial literacy in the Indonesian capital market shows a significant increase each year; however, the financial literacy in the stock products is still low, compared to the literacy in other products, such as mutual funds and government securities. Meanwhile, the majority of investors in the Indonesian capital market are more dominated by retail investors than foreign investors. The dominant number of retail investors will certainly and significantly impact when accompanied by high levels of financial literacy. Therefore, the Indonesian capital market as one of the vital driving factors for national economic growth has a greater contribution. This study aims to improve the understanding and financial literacy of investors, particularly retail investors, in making decisions on investment on stocks in the Indonesian capital market. This study used the samples based on particular criteria required to perform a single index model analysis in shaping optimal portfolio from the secondary data of LQ-45 members in the Indonesian capital market within three periods, from 2017 to 2019. The results of the single-index model analysis showed that four stocks, including BBCA, EXCL, INCO, and BBNI stocks, were selected as the members with optimal portfolios. The proportions of investment funds were 40.483% for BBCA stocks, 43.556% for EXCL stocks, 10.54% for INCO stocks, and 5.421% for BBNI stocks. The study also figured out that the optimal portfolio construction could reduce the accumulation risk by 0.008%, compared to the individual risk of each stock, which was 0.2% - 6.3%.