ANALYSIS OF OPTIMAL STOCK PORTFOLIO FORMATION WITH SECTOR ROTATION INVESTMENT STRATEGY USING INDONESIAN LQ45 INDEX

• Main Author: Luthfi Firdaus Sudjana, M.
• Format: Theses
• Language: Indonesia
• Subjects: Manajemen umum
• Online Access: https://digilib.itb.ac.id/gdl/view/87431
• Institution: Institut Teknologi Bandung

Sector rotation investment strategy is one contemporary example of investment strategies. This thesis investigates the effectiveness of incorporating sector rotation strategy for optimal stock portfolios. The primary objective is to ensure whether sector rotation can enhance portfolio returns compared to common indexes in Indonesia Stock Exchange such as Jakarta Composite Index (JCI) and LQ45. The study begins by defining sector rotation, which involves shifting investments among different market sectors based on predictive economic cycles, aiming to capitalize on the cyclical movements in sector performance. Then identification of business cycles from Indonesia’s GDP which represents economic growth will be conducted, in which the different business cycles are divided into four stages. The four stages of business cycles are early contraction, late contraction, early expansion, late expansion, where all the periods of business cycles are identified from the year 2018 to 2021. Afterwards, selection of stocks that represent each sector identification in Indonesia Stock Exchange will be analysed in the period of full business cycle, taken specifically from LQ45. The performance of stocks in each sector represents the sector’s performance during different period of business cycle. From there, a portfolio of stocks from different sectors will be compiled, which differs in each business cycle. Monthly stock return is analysed, and then using variance-covariance matrix in Microsoft Excel solver with intention to maximize Sharpe ratio, a list of stocks portfolio with specific allocation percentage is created for every phase of business cycle to maximize risk-adjusted return. The portfolio performance will be compared to the performance of JCI and LQ45 index. The results reveal that portfolios utilizing a sector rotation strategy outperform those with static allocations in terms of risk-adjusted returns. Using a scenario of initial investment of 100 million IDR, the portfolio that utilize sector rotation strategy generates a return of 230.35% during full business cycle. This is superior to returns generated by static investment in LQ45 index and JCI which generated return of -16.3%, and -4.42% respectively.