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 holdingperiod, while the investment stock risks are significantly not affected by the holdingperiod. 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

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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 12week. 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:

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Rm

=

∑ IHSG

t

− IHSGt −1

IHSGt −1

where Rm = market return; IHSG = Indonesia Composite Index

Ri

=

DIV1 + P1 − Po Po

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 holdingperiod 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 IHSG

E (Ri) 1Week 0.64%

E (Ri) 4-Week 2.62%

E (Ri) 12-Week 7.79% Std. Deviation

Variance IHSG 1-Week 0.0009

4-Week 0.0040

12-Week 0.0118

1-Week 0.0294

4-Week 0.0630

12-Week 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%

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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

Stock 1-Week

4-Week

Standard Deviation 12-Week

1-Week

4-Week

12-Week

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%

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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%

36.03%

114.54%

313.17%

148.98%

283.55%

503.56%

TOTAL

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 IHSG

E (Ri) 1Week 33.46%

E (Ri) 4-Week 34.09%

E (Ri) 12-Week 33.76% Std. Deviation

Variance IHSG 1-Week 4.49%

4-Week 5.16%

12-Week 5.13%

1-Week 21.18%

4-Week 22.71%

12-Week 22.65%

Table 5 Annualized Return of each Stocks STOCK BNGA ANTM UNTR AALI INTP ASII KLBF UNVR PNBN BBCA TLKM INKP INDF ISAT GGRM TOTAL

E (Ri) 1-Week 208.37% 77.75% 71.31% 66.25% 57.19% 56.77% 50.72% 47.94% 45.52% 42.51% 41.37% 39.27% 30.43% 20.78% 13.57% 869.77%

E (Ri) 4-Week 182.77% 75.15% 74.19% 65.07% 57.00% 59.31% 53.33% 48.59% 45.22% 41.36% 39.40% 38.38% 30.52% 16.45% 13.88% 840.63%

E (Ri) 12-Week 177.82% 69.90% 83.65% 66.10% 54.88% 56.77% 60.46% 44.53% 55.50% 40.68% 37.23% 43.63% 33.41% 14.05% 13.61% 852.23%

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

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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

Stock 1-Week

4-Week

BNGA

1528.54%

1140.45%

ANTM

42.00%

INKP

Standard Deviation 1-Week

4-Week

12-Week

922.28%

390.97%

337.71%

303.69%

37.24%

26.63%

64.81%

61.02%

51.61%

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%

1873.74%

1489.01%

1357.08%

1074.32% 1022.34%

1048.24%

TOTAL

12-Week

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 Between Groups Within Groups Total

.307 1.808 2.115

Df 2 340 342

Mean Square .153 .005

F 28.843

Sig. .000

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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 holdingperiod 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 holdingperiod 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 12Week holding-period group reveals that there is significantly difference average return. Table 8 Multiple Comparisons (I) HoldingPeriod

(J) HoldingPeriod

Mean Difference (I-J)

Std. Error

Sig.

1-Week

4- Week -.0319585(*) 0.0101845 0.005 12 -Week -.1199619(*) 0.0165499 0.00 4-Week 1-Week .0319585(*) 0.0101845 0.005 12-Week -.0880034(*) 0.0183409 0.00 12-Week 1-Week .1199619(*) 0.0165499 0.00 4-Week .0880034(*) 0.0183409 0.00 * The mean difference is significant at the .05 levels.

95% Confidence Interval Lower Upper Bound Bound -0.055933 -0.158921 0.007984 -0.131178 0.081003 0.044828

-0.007984 -0.081003 0.055933 -0.044828 0.158921 0.131178

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

Between Groups Within Groups Total

Sum of Squares

df

Mean Square

F

Sig.

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

BA1 2009 _ Analysis of Investment Holding Period, Return, and Risk 8 of 9

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 holdingperiod 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. REFENCES Anastasia, Njo, YW Gunawan, and I Wijayanti.2003.Anaisis Faktor Fundamental dan Risikosistematik Terhadap harga Saham Properti di BEJ. Jurnal Akuntansi & Keuangan Vol.5,No.2, 123-132. Beck, Kristine L, EF Goldreyer, and LJ D’Antonio.2000.Duration Gap In The Context of A Bank’s StratgticPlanning Process. Journal of Finance and Strategic Decisions, Volume 13, Number 2, 57-71. Bursa Efek Jakarta. 2002. JSX Statistics. Jakarta. PT Bursa Efek Jakarta. Bursa Efek Jakarta. 2003. JSX Statistics. Jakarta. PT Bursa Efek Jakarta. Bursa Efek Jakarta. 2004. JSX Statistics. Jakarta. PT Bursa Efek Jakarta. Bursa Efek Jakarta. 2005. JSX Statistics. Jakarta. PT Bursa Efek Jakarta. Bursa Efek Jakarta. 2006. JSX Statistics. Jakarta. PT Bursa Efek Jakarta. Elfakhani, Said & Zaher, Tarek.1998.Differential Information Hypothesis, Firm Neglect and The Small Firm Size Effect. Journal of Finance and Strategic Decisions, Volume 11, Number 2, 29-40. Fischer, Donald E & Ronald J. Jordan. 1995. Security Analyses And Portfolio Management. Sixth Edition. New Jersey. Prentice-Hall Inc. HK, Margaretha dan YFD, Wijayanti. 2005. Analisis Risiko Investasi dalam Portofolio Saham Melalui Diversifikasi Jangka Waktu Kepemilikan dan Jenis Saham untuk Periode Tahun 2000-2003 di Bursa Efek Jakarta. Tesis. Jakarta. Universitas Katolik Atmajaya.

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