AN ANALYSIS OF RISK AND RETURN AND CRITERIA FOR SELECTION OF STOCK PORTFOLIOS IN SINGAPORE

Abstract

This study empirically analyses the risk and return of stocks traded at the Stock Exchange of Singapore, using the tools of capital market theory and portfolio theory. Portfolio theory deals with the selection of optimal portfolios by rational risk-averse investors. Capital market theory deals with the relation between security returns and risk if investors behave in this optimal fashion. Investors would want to know the magnitude of the risk and return of stocks traded at our local stock market; whether the magnitude of a stock's return is positivey correlated with beta (beta is the sensitivity of a stock's price to changes in market); whether beta is stable and predictable; how many stocks are required to sufficiently diversify risk; how to rank stocks using performance evaluation techniques; and what are the criteria for selection of stock portfolios in Singapore. This study answers the above questions uppermost in the minds of all investors. Data on security prices are obtained from the Financial Database, Faculty of Accountancy and Business Administration of the National University of Singapore.