Application of capital asset pricing model (capm) in analysis of listed retail stocks on the Vietnam stock market

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Dissertation submitted in partial fulfillment of the

Requirement for the MSc in Finance

FINANCE DISSERTATION ON

APPLICATION OF CAPITAL ASSET PRICING MODEL (CAPM)

IN ANALYSIS OF LISTED RETAIL STOCKS

ON THE VIETNAM STOCK MARKET

NGUYEN THI MAI TRANG

ID No: 19046117

Intake 3

Supervisor: Dr. TRAN THI XUAN ANH

September 2020

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ACKNOWLEDGEMENTS

Over a year of pursuing Master of Science in Finance of the University of

the West of England, the contents designed for the curriculums as well as the

dedicated instructing and tutoring of the teachers helped me to improve a lot of

financial knowledge and other soft skills. I believe that these knowledge and skills will

help me develop myself more and more, especially in the better career in the future.

First of all, I would like to thank my tutor Dr. Tran Thi Xuan Anh who

gave me a lot of helpful and wonderful feedbacks, comments and ideas for me to

complete my study program. Second, I would also like to thank my family, friends

and colleagues who have always supported and helped me throughout my study

and research. Finally, I thank all of the faculty and program staff for supporting

me throughout the course.

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EXECUTIVE SUMMARY

This dissertation studies knowledges related to CAPM model (Capital

Asset Pricing Model), including but not limited to theoretical background of

CAPM and its mathematical basis, assumptions, advantages and disadvantages. At

the same time, this dissertation also delves into the CAPM model's development

and expansion over time and through actual studies and researches, as well as

summaries of the studies that have been done related to the CAPM model in

different countries around the world, especially in Asia and Vietnam.

This dissertation researches on Vietnam's Stock market in general and the

retail industry in particular, analyzing opportunities and challenges for investing

in retail stocks in the Vietnamese Stock market. This dissertation uses CAPM

model to value retail stocks that are listed on the Vietnamese Stock market on

both official stock exchanges, HOSE and HNX. There are 23 stocks of companies

in the retail industry for data and analysis. Based on the theories of the CAPM

model to calculate, this dissertation shows which stocks are overvalued (8 stock

codes) and which stocks are undervalued (15 stock codes). From the evaluation of

the value of stocks, the research has selected potential stocks (with 6 selected

stock codes) based on the criteria given (having positive return during the period

starting from listing to June 30 2020, having positive returns from 2019 to June 30

2020, and is undervalued) to describe how to build an optimal portfolio, based on

the lowest level of the risk of portfolio (lowest standard deviation).

From the above research content, this dissertation points out limitations of

CAPM application in valuation of retail stocks on the Vietnam Stock Market as

well as some recommendations learnt from CAPM application in research.

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TABLE OF CONTENTS

ACKNOWLEDGEMENTS................................................................................................. 1

EXECUTIVE SUMMARY.................................................................................................. 2

LIST OF GRAPHS .............................................................................................................. 6

LIST OF TABLES ............................................................................................................... 7

ACRONYMS ........................................................................................................................ 8

INTRODUCTION................................................................................................................ 9

1. Importance of the research topic ................................................................................ 9

2. Purposes of the research topic................................................................................... 10

3. Research Subject, Scope and Methods..................................................................... 10

4. Research Structure..................................................................................................... 11

CHAPTER I: LITERATURE REVIEW......................................................................... 12

1.1. Theoretical background of CAPM and its mathematical basis .......................... 12

1.1.1. Overview of the CAPM ...................................................................................... 12

1.1.2. Assumptions in CAPM....................................................................................... 13

1.1.2.1. Assumptions on investors’ attitudes............................................................. 13

1.1.2.2. Assumptions on capital market .................................................................... 13

1.1.3.1. Market Portfolio (M).................................................................................... 16

1.1.3.2. Risk Premium for Market Portfolio ............................................................. 17

1.1.3.3. Expected Rate of Return of Individual Securities........................................ 18

1.1.3.4. Beta Ratio..................................................................................................... 21

1.1.3.5. Security Market Line.................................................................................... 22

1.1.4. Extended CAPM................................................................................................. 23

1.1.4.1. CAPM with borrowing restrictions.............................................................. 24

1.1.4.2. CAPM with Zero Beta Ratio........................................................................ 25

1.1.4.3. CAPM with Multiple Investment Terms ..................................................... 27

1.1.4.4. CAPM with Transaction Costs and Taxes................................................... 28

1.1.5. Advantages and Disadvantages of CAPM ........................................................ 29

1.1.5.1. Stability of Beta ........................................................................................... 30

1.1.5.2. Relationship between Expected Rate of Return and Beta............................ 30

1.1.5.3. Effects of Non-normal Distribution ............................................................. 30

1.1.5.4. Unusual Limitations of CAPM application ................................................. 31

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1.1.5.5. Fama and French studies and findings......................................................... 31

1.1.5.6. Criticism from Researchers of Multi-factor Model ..................................... 32

1.2. Empirical research .................................................................................................. 33

SUMMARY OF CHAPTER I....................................................................................... 38

CHAPTER II: DATA AND METHODOLOGY............................................................. 40

2.1. Conditions for the model application .................................................................... 40

2.2. Data and Methodology............................................................................................ 41

2.3. Methodology............................................................................................................. 43

2.3.1. Assessment of retail stocks on the Vietnam stock market ................................ 43

2.3.1. Building the Optimal Portfolio.......................................................................... 44

SUMMARY OF CHAPTER II...................................................................................... 46

CHAPTER III: RESULTS OF APPLICATION OF CAPM IN ANALYSIS

OF RETAIL STOCKS ON THE VIETNAM STOCK MARKET................................ 47

3.1. Vietnam Stock Market and Prospect of Retail Stock Investment on the

Vietnam Stock Market................................................................................................... 47

3.1.1. Overview of the Vietnam Stock Market............................................................. 47

3.1.2.2. Opportunities and Challenges to Invest in Retail Stocks.............................. 55

3.2. Application of CAPM in Analysis of Retail Stocks on the Vietnam

Stock Market................................................................................................................... 59

3.2.1. Database ............................................................................................................. 59

3.2.1.1. Rate of Return .............................................................................................. 59

3.2.1.2. Standard Deviation....................................................................................... 61

3.2.1.3. Coefficient of Variation ............................................................................... 62

3.2.2. Estimation of CAPM Parameters...................................................................... 63

3.2.2.1. Risk-free Interest Rate.................................................................................. 63

3.2.2.2. Market Portfolio........................................................................................... 64

3.2.2.3. Beta Ratio..................................................................................................... 65

3.2.3. Appliance of CAPM in Retail Stock Valuation ................................................ 66

3.2.4. Building the Optimal Portfolio.......................................................................... 68

3.2.4.1. Stock selection for optimal portfolio ........................................................... 68

3.2.4.2. Building optimal portfolio ........................................................................... 71

SUMMARY OF CHAPTER III.................................................................................... 74

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CHAPTER IV: ASSESSMENT OF CAPM APPLICATION IN ANALYSIS

OF RETAIL STOCKS ON THE VIETNAM STOCK MARKET................................ 75

4.1. Limitations of CAPM application in valuation of retail stocks on the

Vietnam Stock Market................................................................................................... 75

4.1.1. General Limitations of CAPM Application on the Vietnam Stock

Market .......................................................................................................................... 75

4.1.2. Limitations of CAPM Application in Valuation of Retail Stocks on

the Vietnam Stock Market ........................................................................................... 76

4.1.2.1. Measure of Risk - Standard Deviation......................................................... 76

4.1.1.2. Market Portfolio........................................................................................... 81

4.1.1.3. Beta Ratio..................................................................................................... 82

4.1.1.4. Other Limitations......................................................................................... 82

4.2. Some recommendations learnt from CAPM application in research ................ 83

SUMMARY OF CHAPTER IV .................................................................................... 87

CONCLUSIONS ................................................................................................................ 88

REFERENCES................................................................................................................... 89

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LIST OF GRAPHS

Graph 1.1: Capital Allocation Line (CAL) and Capital Market Line (CML)

Graph 1.2: Stock Market Line (SML)

Graph 1.3: Stock Market Line (SML) and Alpha

Graph 1.4: Efficient Frontier with different borrowing & lending rates

Graph 1.5: Efficient portfolios and zero-beta portfolios

Graph 1.6: SML and zero-beta portfolios

Graph 1.7: CAPM with transaction costs

Graph 3.1: Scale and Growth of Retail Industry in Vietnam

Graph 3.2: Proportion of logistic revenue in total retail sales in Vietnam

Graph 3.3: The proportion of households in Vietnam

Graph 3.4: The proportion of ranges of age in Vietnam

Graph 3.5: Median Age of Countries

Graph 3.6: Porter’s Five Forces Model of Retail industry in Vietnam

Graph 3.7: Standard deviations of retail stocks with positve rate of return

Graph 3.8: Coefficient of variation of retail stocks with positve rate of return

Graph 3.9: Fluctuation of the VN-Index from 2010 to 2020

Graph 3.10: Beta Ratio of Retail stocks

Graph 3.11: The sets of Expected Return and Standard Deviation of Portfolio

Graph 4.1: Interest rates of Vietnam 5-year government bonds

from 2018 to 30 June, 2020

Graph 4.2: Distribution of the rate of return of Retail stocks

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LIST OF TABLES

Table 2.1: List of stocks in the retail industry of Vietnam for the research

Table 3.1: Information and Financial indicators of Retail companies

on the Vietnam Stock Exchanges

Table 3.2: Year when Retail stocks are listed in Vietnam Stock Exchanges

Table 3.3: Average Daily/Annual Rate of Return of Retail stocks

Table 3.4: Terms and Conditions of Government Bond

Table 3.5: Valuations of Retail stocks

Table 3.6: The stocks are selected for the portfolio

Table 3.7: Average Daily Return and Standard Deviation of selected stocks

Table 3.8: Correlation of selected stocks

Table 3.9: Covariance of selected stocks

Table 3.10: The sets of Proportion of stocks in the portfolio

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ACRONYMS

CAPM Capital Asset Pricing Model

SML Stock Market Line

CML Capital market line

CAL Capital allocation line

M Market portfolio

P/E Price/Earning

BV Book Value

DCF Discounted Cash Flows

HOSE Ho Chi Minh Stock Exchange

HNX Ha Noi Stock Exchange

IT Information Technology

GDP Gross Domestic Product

CFA Chartered Financial Analyst

SD Standard Deviation

VBMA Vietnam Bond Market Association

SSC State Securities Commission

ROE Return on Equity

ROA Return on Asset

GMM General Method of Moments

SIM Single Index Model

OTC Over The Counter

VSD Vietnam Securities Depository