Bachelor'S Graduation Thethisthesis: National Economics University Centre For Advanced Educational Programs

NATIONAL ECONOMICS UNIVERSITY
CENTRE FOR ADVANCED EDUCATIONAL PROGRAMS
BACHELOR’S GRADUATION THETHISTHESIS

Major in Finance
APPLYING MARKOWITZ THEORY AND

UTILITY THEORY TO CONSTRUCT AN OPTIMAL
STEEL PORTFOLIO FOR STEEL INDUSTRY
By Nguyen Phan Quang

HANOI, 2018
NATIONAL ECONOMICS UNIVERSITY
CENTRE FOR ADVANCED EDUCATIONAL PROGRAMS
GRADUATION THESISBACHELOR’S THETHIS

APPLYING MARKOWITZ THEORY AND
UTILITY THEORY TO CONSTRUCT AN OPTIMAL
STEEL PORTFOLIO FOR STEEL INDUSTRY
Student: Nguyen Phan Quang

Major: Finance
Class: Advanced Finance 56C
Student’s ID: 11143634
Supervisor: MSc. Fin. Le Phong Chau Formatted: English (United States)
Hanoi - 2018
TABLE OF CONTENT
CHAPTER 1. INTRODUCTION OVERVIEW ............................................................................. 87
1.1. RATIONALE ....................................................................................................................................... 87
1.2. RESEARCH OBJECTIVE ................................................................................................................... 87
1.3. OBJECT AND SCOPE OF STUDY ..................................................................................................... 98
1.4. RESEARCH METHODOLOGY .......................................................................................................... 98
1.5. STRUCTURE OF STUDY ................................................................................................................... 98
CHAPTER 2. LITERATURE REVIEW RISK, RETURN, UTILITY AND MARKOWITZ

PORTFOLIO THEORY........................................................................................................................109
2.1. BASIC PORTFOLIO THEORY OVERVIEW....................................................................................109
2.1.1. RISK AND RETURN CONCEPT................................................................................................................. 109
2.1.2. INVESTMENT PORTFOLIO DEFINITION ................................................................................................ 109
2.1.3. RISK, RETURN AND RISK-RETURN RELATIONSHIP IN INVESTMENT PORTFOLIO ..................1110
2.2. UTILITY AND LEVEL OF RISK AVERSION CONCEPT ........................................................... 1716
2.2.1. RISK AVERSION OF AN INDIVIDUAL INVESTOR .............................................................................1816
2.2.2. UTILITY VALUE ......................................................................................................................................1817
2.2.3. INDIFFERENCE CURE ..............................................................................................................................1918
2.3. MARKOWITZ PORTFOLIO THEORY ........................................................................................ 2019
2.3.1. MARKOWITZ THEORY’S ASSUMPTION .............................................................................................2019
2.3.2. STEPS OF BUILDING PORTFOLIO REGARDING MARKOWITZ THEORY .....................................2120
2.3.3. OPTIMAL INVESTMENT PORTFOLIO AND EFFICIENT FRONTIER ...............................................2120
2.3.4. CONSTRUCT OPTIMAL INVESTMENT PORTFOLIO ..........................................................................2423
CHAPTER 3. RESEARCH METHODOLOGY ....................................................................... 2625

3.1. DATA COLLECTION AND PROCESSING ................................................................................... 2625
3.2. OPTIMAL PORTFOLIO CONSTRUCTION PROCESS FOR VIETNAM’S STEEL INDUSTRY .. 2726
CHAPTER 4. RESEARCH RESULTS ....................................................................................... 2928

4.1. VIETNAM’S STEEL INDUSTRY OVERVIEW IN 2017 AND PROSPECTS FOR 2018 .............. 2928
4.1.1. VIETNAM STEEL INDUSTRY IN 2017.................................................................................................2928
4.1.2. PROSPECT OF STEEL INDUSTRY IN 2018 .........................................................................................3331
4.2. ANALYSING STEEL INDUSTRY STOCK AVAILABLE IN INVESTMENT PORTFOLIO .......... 3533
4.3. EMPIRICAL RETURN AND RISK OF STOCKS AND VN-INDEX FROM 1/1/2016 TO 31/12/2017
3534
4.3.1. EMPIRICAL RETURN ...............................................................................................................................3534
4.3.2. EMPIRICAL RISK (STANDARD DEVIATION) .....................................................................................3634
4.4. EXPECTED RETURN OF EACH STOCK IN INVESTMENT PORTFOLIO ................................. 3635
4.5. EXPECTED RETURN AND STANDARD DEVIATION OF INVESTMENT PORTFOLIO ............ 3836
4.5.1. EXPECTED RETURN OF INVESTMENT PORTFOLIO .........................................................................3836
4.5.2. RISK (STANDARD DEVIATION) OF INVESTMENT PORTFOLIO ....................................................3837
4.6. OPTIMAL PORTFOLIO CONSTRUCTION FOR INDIVIDUAL INVESTOR ............................... 3938
CHAPTER 5. CONCLUSIONS AND RECOMMENDATIONS .......................................... 4443

5.1. CONCLUSION FOR THE FINAL OPTIMAL PORTFOLIO FOR STEEL INDUSTRY IN VIETNAM
4443
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5.2. PROBLEMS IN THEAPPLICATION OF MARKOWITZ MODEL ............................................... 4543 Formatted ...
5.3. PRACTICALITY OF MARKOWITZ MODEL .............................................................................. 4544
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5.4. IMPROVING PRACTICALITY OF OPTIMAL PORTFOLIO THEORY IN VIETNAM SECURITIES
MARKET ................................................................................................................................................... 4645 Formatted ...
5.4.1. BUILDING AN EFFICIENT INFORMATION SYSTEM .........................................................................4745 Formatted ...
5.4.2. DIVERSIFYING FINANCIAL INSTRUMENTSIN VIETNAM ..............................................................4745
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5.4.3. EDUCATING INVESTORSIN VIETNAM’S SECURITIES MARKET ..................................................4946 ...
5.4.4. IMPROVINGLEGAL FRAMEWORK FOR STOCK INVESTMENT .....................................................4947 Formatted ...
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CONCLUSION......................................................................................................................................... 5350
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REFERENCES ......................................................................................................................................... 5651 Formatted ...
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APPENDIXES ......................................................................................................................................... 5752 ...
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CHAPTER 1. OVERVIEW .......................................................................................................... 74 Formatted ...
1.1. RATIONALE ............................................................................................................................. 74 Formatted ...
1.2. RESEARCH OBJECTIVE .............................................................................................................. 75
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1.3. OBJECT AND SCOPE OF STUDY .................................................................................................. 75 ...
1.4. RESEARCH METHODOLOGY ...................................................................................................... 85 Formatted ...
1.5. STRUCTURE OF STUDY ............................................................................................................. 86 Formatted ...
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CHAPTER 2. LITERATURE REVIEW ...................................................................................... 96 ...
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2.1. BASIC PORTFOLIO THEORY OVERVIEW ..................................................................................... 96 ...
2.1.1. RISK AND RETURN CONCEPT ................................................................................................... 96 Formatted ...
2.1.2. INVESTMENT PORTFOLIO DEFINITION ..................................................................................... 97 Formatted ...
2.1.3. RISK, RETURN AND RISK - RETURN RELATIONSHIP IN INVESTMENT PORTFOLIO ....................... 108
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2.2. UTILITY AND LEVEL OF RISK AVERSION CONCEPT ................................................................ 1614 ...
2.2.1. RISK AVERSION OF AN INDIVIDUAL INVESTOR ...................................................................... 1614 Formatted ...
2.2.2. UTILITY VALUE .................................................................................................................. 1614 Formatted ...
2.2.3. INDIFFERENCE CURE .......................................................................................................... 1715
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2.3. MARKOWITZ PORTFOLIO THEORY ....................................................................................... 1916 ...
2.3.1. MARKOWITZ THEORY’S ASSUMPTION .................................................................................. 1917 Formatted ...
2.3.2. STEPS OF BUILDING PORTFOLIO REGARDING MARKOWITZ THEORY........................................ 1917 Formatted ...
2.3.3. OPTIMAL INVESTMENT PORTFOLIO AND EFFICENT FRONTIER ............................................... 2018
2.3.4. CONSTRUCT OPTIMAL INVESTMENT PORTFOLIO ................................................................... 2220 Formatted ...
Formatted ...
CHAPTER 3. RESEARCH METHODLOGY ........................................................................... 2422 Formatted ...
3.1. DATA COLLECTION AND PROCESSING .................................................................................... 2422 Formatted ...
3.2. OPTIMAL PORTFOLIO CONSTRUCTION PROCESS FOR VIETNAM’S STEEL INDUSTRY ................ 2523
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CHAPTER 4. RESEARCH RESULT ....................................................................................... 2725 Formatted ...
4.1. VIETNAM’S STEEL INDUSTRY OVERVIEW IN 2017 AND PROSPECTS FOR 2018...................... 2725 Formatted ...
4.1.1. VIETNAM STEEL INDUSTRY IN 2017 ................................................................................... 2725 Formatted ...
4.1.2. PROSPECT OF STEEL INDUSTRY IN 2018 ............................................................................. 3028
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4.2. PICKING AND ANALYSING STEEL INDUSTRY STOCK AVAILABLE IN INVESTMENT PORTFOLIO .. 3230 ...
4.3. EMPRICAL RETURN AND RISK OF STOCKS AND VN-INDEX FROM 1/1/2015 TO 31/12/2017 Formatted ...
3331 Formatted ...
4.3.1. EMPRICAL RETURN ............................................................................................................ 3331
4.3.2. EMPRICAL RISK (STANDARD DEVIATION) ............................................................................. 3331 Formatted ...
4.4. EXPECTED RETURN OF EACH STOCK IN INVESTMENT PORTFOLIO .......................................... 3432 Formatted ...
4.5. EXPECTED RETURN AND STANDARD DEVIATION OF INVESTMENT PORTFOLIO ....................... 3533 Formatted ...
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4.5.1. EXPECTED RETURN OF INVESTMENT PORTFOLIO .................................................................. 3533
4.5.2. RISK (STANDARD DEVIATION) OF INVESMENT PORTFOLIO .................................................... 3634
4.6. OPTIMAL PORTFOLIO CONSTRUCTION FOR INDIVIDUAL INVESTOR........................................ 3735 Formatted: Default Paragraph Font, Font: (Default)
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CHAPTER 5. CONCLUSIONS AND RECOMMENDATIONS ................................................ 4240 Formatted: Default Paragraph Font, Font: (Default)
5.1. PROBLEMS ENCOUNTERED WHEN APPLYING MARKOWITZ MODEL ........................................ 4240 +Body (Cambria), Check spelling and grammar
5.2. PRACTICALITY OF MARKOWITZ MODEL ............................................................................... 4240 Formatted: Default Paragraph Font, Font: (Default)
5.3. IMPROVING PRACTICALITY OF OPTIMAL PORTFOLIO THEORY FOR VIETNAM’S STEEL INDUSTRY +Body (Cambria), Check spelling and grammar
STOCKS .......................................................................................................................................... 4341
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5.3.1. VIETNAM’S STEEL INDUSTRY EVALUATION IN 2017 ............................................................ 4341 +Body (Cambria), Check spelling and grammar
5.3.2. BUILDING AN EFFICENT INFORMATION SYSTEM .................................................................... 4442
5.3.3. FINANCIAL INSTRUMENT DIVERSIFICATION IN VIETNAM’S FINANCIAL MARKET ...................... 4442 Formatted: Default Paragraph Font, Font: (Default)
5.3.4. IMPROVING INVESTORS’ KNOWLEDGE OF VIETNAM’S SECURITIES MARKET ............................. 4644
5.3.5. FULFILLING LEGAL FRAMEWORK FOR STOCK INVESMENT ACTIVITIES..................................... 4644 Formatted: Default Paragraph Font, Font: (Default)
CONCLUSION .............................................................................................................................. 4847 Formatted: Default Paragraph Font, Font: (Default)
REFERENCES .............................................................................................................................. 5049
APPENDIXES .............................................................................................................................. 5150














3
3
ACKNOWLEDGEMENTS
For a final year student, working on the graduation thesiís is a wonderful opportunity for
me to review all the knowledge I have acquired during university period. It also helps me
apply what I study to the reality in general. After finishing this graduation thesis, I am sure
I will have a better preparation for me future career.
During the period of working on this graduation thesis, I am very thankful to Ms. . Fin. Le
PhongChau, lecturer in National Economics University for all her instructions for writing
this bachelor’s thesis.
Though I have tried my best in this bachelor’s thesis, I would certainly avoid some
drawbacks. I am really looking forward to receiving comments from readers and teachers.
Thank youSincerely,
Nguyen Phan Quang
4
STATUTORY DECLARATIONS
I have read and understood the violation of academic honesty. I commit with my
personal honour that this bachelor’s thesis is done by myself and there is no
violation of requirement of academic honesty.
Hanoi, April 23, /4/2018
Nguyen Phan Quang
5
ABBREVIATIONS
JSC Joint Stock Company

VND Vietnam Dong
SMB Small minus big
HML High minus low
CAPM Capital Asset Pricing Model
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FIGURES AND TABLES
Graph 2.1 Risk and return for different correlation

Graph 2.2 Relation between 2 types of securities
Graph 2.3 Classify organization zone of portfolio
Graph 2.4 Indifference curve
Graph 2.5 Efficient frontier
Graph 2.5 Interpreting the efficient frontier
Graph 3.1 Vietnam steel industry growth and marketshare
Table 4.1 Beta factor and expected return of stocks
Table 4.2 Expected return of stock in portfolio when equally weighted
Table 4.3 Correlation among stocks in portfolio
Table 4.4 Stocks weight in optimal portfolio when A = 4
Graph 4.1 Stocks weight in optimal portfolio when A = 4
Table 4.5 Stocks weight in optimal portfolio when A = 1
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Formatted: Strikethrough
CHAPTER 1. INTRODUCTION OVERVIEW
1.1. Rationale
The investment portfolio theory was developed in the 1950s and is widely used in
countries where the stock market is developing. Positive effects of investment based
on portfolio have been confirmed in the field studies and tests. However, the stock
market is a potentially risky investment. Investors tended to look for an optimal
portfolio, in other words, the best return portfolio with an defined risk, or the lowest
risk portfolio with defined profit. Harry M.Marcowitz's research in 1952 gave rise
to an investment decision that goes beyond fundamental analysis or technical
analysis, which goes straight to the investor's goal with two concepts of "risk and
return”. The approach that Harry Markowitz developed is called "portfolio
selection" and considered the basis and foundation of the financial industry. The
Vietnam stock market is quite new, investors have not paid attention to the
application of the Markowitz theory. There are many reasons to explain: “What are
the issues that reduce the ability of the Markowitz model in the Vietnamese
market?” This may be due to the shortage of professionalism or investment method
based on insider information, therefore investors have not approached the
application of the model which is quite complicated. Besides, Vietnam stock market
does not provide sufficient information and considered in inefficient weak form, the
ability to satisfy the conditions of the model is limited.
Concepts of “Utility” appear frequently in the field of finance, economics, etc. The
determination of the degree of utility can be considered as the investors have
defined the satisfaction to risk and return, suitable for financial situation.
This study was written to address the issue of improving investment efficiency by
developing an optimal investment portfolio in Vietnam stock market under the
perspective of individual investors. The objective is to choose Vietnam steel
industry and its stock population in Vietnam stock market to build an optimal
portfolio for this industry. From the evaluation of Vietnam steel industry in 2017
and its optimistic prospect in 2018, the writer believe that the portfolio including
stocks of steel industry would provide an ideal portfolio regarding risk and return
for Frominvestors. From the unsolved limitations of Markowitz theory in the
Vietnam stock market, combining with the idea of building an optimalum portfolio
based on Markowitz model and utility for the steel industry in Vietnam, the writer
decided to choose the following topic of study:Em cần giải thích lý do tại sao chọn
ngành thép.
“Applying Markowitz and Utility theory to build an optimal steel portfolio for
inVietnam’s Steel Industry”
1.2. Research objective

The research objective is based on the Markowitz and utility theory to build optimal
portfolio and enhance practicality for ofdecisionsmaking activities byof investors.
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1.3. Object and Scope of Study
The research subject is of the study application of was Markowitz's optimum
portfolio selection and Utility in financial sector.
The scope of the research is coversthe list of steelcovers steel stocks listed on the
Vietnam Stock Exchange (HOSE, HNX and UPCOM) and VN-Index within one
two years (from January 01, /01/2016 to December 31, /12/2017).
1.4. Research methodology

 Probability and Statistics method
 Descriptive, investigation and analysis statistical data
 Analytical and Comparable method
 In addition, process of using specialized software in investment portfolio
construction (Excel spreadsheet and Solver Tool) is added.
1.5. Structure of Study

Introduction and Conclusion, along with five main chapters:
Chapter 1: OverviewIntroduction
Chapter 2: Literature review Risk, Return, Utility and Markowitz Portfolio Theory Formatted: Strikethrough
Formatted: Font: Not Bold
Chapter 3: Research Mmethodology
Chapter 4: Research Results
Chapter 5: Conclusions and Recommendations and Conclusions
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CHAPTER 2. LITERATURE REVIEW RISK,
Formatted: Font: 18 pt
RETURN, UTILITY AND MARKOWITZ
PORTFOLIO THEORY
2.1. Basic portfolio theory overview
2.1.1. Risk and return concept

 Rate of return:
The difference in percentage term between income from securities after a period
(usually a year) and the initial investment. In short, the rate of return is the ratio of
return to the initial investment.
The return of a security is derived from two sources of income:
- Dividend gain (dividends, bonds)
- Capital gain (price difference and purchase price)
 Risk:
Risks reflect how deviate the real income may be from the expected income. The
higher the deviation and the greater the difference, the higher the risk.
2.1.2. Investment portfolio definition

Investment portfolio is an investment of an individual or an organization for holding
of one or more types of stocks, bonds, commodities, real estate investments other
properties.
Thus, an investor's investment portfolio is a combination of one or more different
types of Assets, of which the Investment Asset is held primarily for investment
purposes; Consumption Asset is held for consumption purposes such as housing,
transportation,…
 Financial assets in the investment portfolio
According to CFA Institute Curriculum 2017, the portfolio manager will build the
investment portfolio, taking into account the allocation of target assets. The
importance of selecting and balancing investment assets determines the
effectiveness of the portfolio. Investors of organizations or individuals with
investment properties or specific investment forms are classified as follows:
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- Securities (Securities)
 Fixed-income instruments
Government Bonds
Corporate Bonds
Bills, certificates of deposit, commercial paper issued by government, banks and
corporates.
Repurchase Agreement (Repos)
 Equity
Common Shares
Preferred Shares
 Pooled investments
Mutual funds
Asset-backed securities such as mortgage-backed securities,
 Currency (Currencies)
 Derivatives
Forward contracts
Futures contracts
Swap contracts
Option contracts.
 Alternative Investments
Hedge funds
Venture capital
Real estate
Goods (Commodities)
Infrastructure
Others: Alternative investments such as tangible and intangible assets(patent)
Investors will determine the purpose of their investment as well as their financial
ability to decide on holding different assets with appropriate proportion.
2.1.3. Risk, return and risk- - return relationship in investment portfolio
2.1.3.1. Expected return and risk of an security

 Expected return
11
The expected return on an investment asset is the profitability expected by the
investor when making a decision to invest. When deciding to sacrifice current
consumption to invest in an asset, the investor's primary concern is how much
expected future return on that asset is. The higher the expected return, the more
attractive to the investor. Therefore, in the same investment environment, investors
will choose the type of assets with higher expected return. When assets are similar,
an increase in the yield of an asset over an alternate asset results in an increase in
the demand for that asset.
The average return of a security is the expected value on investment in securities,
determined by the following formula:
∑𝑇𝑡=1 𝑅𝑡
𝐸 (𝑅 ) = 𝑅 =
𝑇
Where:
- Rt: return in period t
- T: total period with return data
- 𝑅: average yield of periods
 Risk of an security
The level of risk or uncertainty about the return of an asset also affects the
investment decision and therefore affects the demand for that asset. When other
factors do not change, if the risk of an asset increases against the risk of another
asset, the demand for it will decrease. Of course, the relative risks normally
associated with the expected return. Therefore, investors will have to select risky
investment assets that are acceptable rather than simply choose the type of assets
with high expected return. If the same rate of return is expected, investors will
clearly choose and hold less risky assets.
If the profit level has the greater fluctuation, the profitability is more uncertain, but
if the fluctuation small, the investment is less risky.
- Risk measures:
In investment analysis, the two most common ways of measuring investment risk,
which are variance and standard deviation.
 Variance
Reflects the possibility that the observed values may deviate far from the expected
values
Population variance (𝝈𝟐 ), when knowing the yield Rt for each period and the total
period (T):
∑𝑇𝑡=1(𝑅𝑡 − 𝜇)2
𝜎2 =
𝑇
Where:
12
μ is the mean value considered as the core variable of the descriptive statistics set, it
represents the central value of the observations, and hence is also called the
expected value of the return.
Sample variance (s2), used for the mesuremeasurement ofvariance of a set of data Formatted: Superscript
taken from the population
∑𝑇𝑡=1(𝑅𝑡 − 𝑅)2
𝑠2 =
𝑇−1
 Standard deviation
Standard deviation is measured with the same function as the variance but at first
degree.
The standard deviation taken from population variance and sample variance have
the same equation: = √𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒
2.1.3.2. Measurement the relation between 2 securities

While investing, investors are always concerned about the mutual interaction of two
random variables. To quantify this relationship, usually two dimensions are the
covariance and the correlation coefficient.
 Covariance
Covariance is a statistical quantity used to measure the level of equilibrium
of two random variables. In the financial sector, the concept of covariance is used to
measure the degree of change in return or prices of two types of investment assets.
Formula:
∑𝑛𝑡=1{(𝑅𝑡,1 − 𝑅1 ) − (𝑅𝑡,2 − 𝑅2 )
𝐶𝑜𝑣1,2 =
𝑛−1
Where:
𝑅𝑡,1 : return of stock 1 in period t
𝑅𝑡,2 : return of stock 2 in period t
𝑅1: average return of securities 1
𝑅2: average yield of securities 2
n: number of periods
Covariance breaking down:

Positive Covariance: If the mean or expectation of the first variable increases, the
mean or expectation of the second variable tends to increase.
Negative Covariance: If the mean or the expectation of the first variable increases,
the mean or expectation of the second variable tends to decrease.
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Zero Covariance: This is the case for two independent random variables.
=>Covariance can run from negative to positive and the magnitude of covariance
depends on the unit of measure of the two variables. Therefore, in order to compare
the relative level of variables when applying different measurement units, it is
difficult to use covariance.
 Correlation coefficient
To quantify the variability of the portfolio in the diversified portfolio, use the
formula to determine the correlation coefficient (ρ) of the return of assets.
𝑐𝑜𝑣1,2
𝜌1,2 =
𝜎1 𝜎2
Where:
𝜌1,2 : correlation coefficient between asset 1 and asset 2
𝜎1 : standard deviation of stock 1
𝜎2 :: standard deviation of the stock 2
=> Interpreting the meaning of coefficient correlation

Correlation coefficient = 1: the deviation of mean or expected return of 2 securities
will always move in the same direction. This is called absolute positive correlation
Correlation coefficient = -1: deviation of mean or expected return of 2 securities
will always move in the opposite direction. This is called absolute negative
correlation
Correlation coefficient = 0: there is no relationship between the return of the two
securities. Actual fluctuations in the return of a security do not say anything about
the volatility of the remaining securities
=>The value of the correlation coefficient ranges from -1 to 1. To compare and
visualize the relative strength of the two assets, the relative correlation coefficient is
often used.
=>Investors reduce the risk by adjusting the portfolio by increasing investment in
assets with a low correlation coefficient and reducing investment in highly
correlated assets. If the correlation coefficient of the portfolio is less than 1, then the
investment portfolio will be diversified.
2.1.3.3. Risk and return of investment portfolio

 Return of investment portfolio
The expected return of the portfolio is the weighted average of the expected returns
of each asset or stock individually in the portfolio. The weight here is the weight of
each asset or stock.
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𝑛
𝐸 (𝑅𝑝) = 𝑤1 𝐸(𝑅1 ) + ⋯ + 𝑤𝑛 𝐸 (𝑅𝑛 ) = ∑ 𝑤𝑖 𝐸(𝑅𝑖 )
1
Where:
- wi: weight of security i in portfolio
- E (Ri): expected return of security i
 Risk of investment portfolio

The risk of the portfolio is the difference between the actual profit and the expected
return of a portfolioand is measured by the variance (𝜎 2 ) or the standard deviation
(σ) of the portfolio.
The variance of the portfolio consists of two securities:
𝜎 2 = 𝑤12 𝜎12 + 𝑤22 𝜎22 + 2𝑤1 𝑤2 𝑐𝑜𝑣1,2
Where:
𝜎 2 : variance of portfolio
𝜎12 , 𝜎22 : variance of security 1, 2
𝑤1 , 𝑤2 : weighted of security 1, 2
𝑐𝑜𝑣1,2 : covariance of security 1, 2
 The risk of the portfolio will decrease as the correlation between the securities
decreases. That is, the low correlation coefficient between the securities will
increase the benefits of diversifying the portfolio and vice versa.
Graph 2.1: Risk and return for difference correlation
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Source: CFA level 1 – volumnvolume 4
Standard deviation equation:
𝜎𝑝 = √𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒
2.1.3.4. Investment efficient for portfolios
When investors invest in a single type of investment, the risk is very large.
Therefore, it is necessary to identify an appropriate property for risk. The
investment portfolio is guaranteed to be required investment return and investors
can adjust the portfolioto match the required return. When investing in the portfolio,
the individual risks of the stock are diversified.
The return and risks of each type of stock are influenced by two groups of factors,
each of which involves individual securities and a general element related to the
whole macro economy and the whole market. Risk for stock investing will be equal
to:
Total Risk = Systemic Risk + Non-systemic Risk
Where, non-systematic risk relates to the characteristics of the company, often
known as company specific risk; and systemic risk that affects all securities in the
market. In the two types of risk, only non-systematic risk can be eliminated through
diversification.
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Graph 2.2: Relationship between two types of securities
Source: CFA level 1 – Volume 4
Measuring the risk by variance or standard deviation reflects the total risk, where
individual investments require both systemic and non-systematic risk tolerance. But
for portfolio investment, non-systematic risk will be reduced or eliminated. As the
number of securities in the portfolio is increased, the overall risk of portfolio
decreases. In that, non-systematic risk decreases but systemic risk does not change,
so in the total risk, the proportion of non-systematic risk decreases while the
proportion of systemic risk increases. The more diversified the portfolio, the higher
the correlation to the market portfolio and the smaller the unsystematic risk. The
larger the amount of securities in a portfolio, the smaller the unsystematic risk, the
greater the risk is as close to the systematic risk. An investment portfolio with 12 to
18 stocks is a portfolio that has reached 90% of the effect of diversification. The
greater the number of securities in the portfolio, the greater the effect of
diversification, and the more likely the portfolio risk will be to be less than the
adding up risk of each individual security.
2.2. Utility and level of Risk Aversion Concept Formatted: Font: Bold
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2.2.1. Risk Aversion of an individual investor
Risk aversion is the level of investor’ss willingness to allocate his wealth into a
stock or a portfolio. Most of the investors in the market have a certain level of risk
aversion, so risk aversion is a fundamental concept in the analysis of investment
options. Each investor is an independent individual, they have different psychology
and wealth, so their level of risk acceptance is also very different. Usually, with the
same type of investment, investors with higher risk aversion will require more
appropriate risk compensation to accept their investment and vice versa. According
to risk aversion level, we can be divided investors into three following groups:
 Risk-averse investors: If there are two investment options with the same
expected return. Investors who do not like risk will always choose the
investment with lower risk. In other words, investors will only accept more risk
if the expected return increases to compensate for those risks.
 Risk-neutral investors: Investors do not care about the relationship between
return and risk. They decide their investment based on the level of profit, the
higher the profit, the better, regardless of how much risk. In other words, they do
not require increasing profits to offset the risk.
 Risk-seeking investors: Investors prefer more risk when two investments have
the same expected return.
2.2.2. Utility Value

Utility Function represents the useful relationship of a currency unit with the level
of risk of the investment and the level of risk aversion of an individual investor. The
utility of the portfolio is the level of satisfaction that portfolio brings to investors.
Utilization is assessed on the basis of the expected return and risk of the portfolio.
Determination of utility through function:
𝑈 = 𝐸𝑅 - 0.005 × 𝐴 × σ2
While:
- U: the utility of investors
- E (R): expected return of the portfolio
- A: risk aversion of investors
- σ2: variance of expected return
The above function shows that the useful value is proportional to the expected
return, inversely proportional to the risk aversion of each investor and the risk of the
investment (variance). In general, investors who consider different investments will
choose the ones that give them the greatest level of utility, which means, the best
level of risk - return. In the case where there is no risk, which means the portfolio’s
variance is equal to zero (σ2 = 0), the utility value is equal to the expected return (U
= E (R)). Therefore, if investing in risk-free portfolio, the effective utility value of
that portfolio will be equal to the expected return.
18
In investment theory, risk aversion is quantified by A value:
 Risk-seeker investors: A < 0
 Risk-neutral investors: A = 0
 Risk-averse investors: A > 0
The higher A value is, the greater the level of risk apprehension of investors. In fact,
in the market with majority of risk averse investors, they represent the group of
rational investors. Therefore, the relationship between profit and risk is based on the
psychology of the majority of investors.
2.2.3. Indifference cure
Graph 2.3: Classify the zone organization of portfolio
When choosing the right investment options, the investment items in zone I have
the most advantage, because they have high interest rates and low risk compared to
other regions. Portfolio located in zone IV are least advantageous. For the fish in the
area II and III only meet one of two factors: high return or low risk. The equally
favorite portfolio will be on the same curve, linking all of these points back to the
same level of utility or called as the indifference curve
The indifference curves are a collection of the same level of utility for investors.
That is, on the same indeterminate path, the risk or expected return between the
different types of portfolio, but the combination of both return and risk will give the
same level of utility.
Graph 2.4: The indifference curve
19
The indifference curve I1 is most preferred, with the same level of risk, but with the
highest expected return. The indifference curve I2 is preferable to the indifference
curve I3. The higher the gradient, the higher the degree of risk aversion, as they are
the only risk takers who can expect the expected return of the portfolio to
compensate for the risk which investors may face. The indifference curve of risk
aversion investors will have a higher slope than those of risk seeker investor.
2.3. Markowitz Portfolio theory
In 1952, Harry Markowitz introduced the formal model for portfolio selection,
which reflected the principle of diversification. His research was published in the
Journal of Finance entitled Portfolio Portfolio. He officially published his theory of
systems in 1959, the Markowitz model has become one of the core concepts in
investment theory. The theory that he proposed was, "Unlike previous investment
methods, the focus was primarily on predicting the price movement of a security
based on the use of fundamental and technical analysis. Markowitz has developed a
method that focuses on the development of a wealth-based asset portfolio based on
the combination of risk and return.” His model is the first step for the management
of the portfolio, defining a system of effective portfolios, the set of these portfolios
will have the indifference curve for risky securities. Markowitz's approach has
always been highly valued for financial analysis over the past 60 years, making it a
useful tool for investors.
2.3.1. Markowitz theory’s assumption

The Markowitz theory is based on assumptions:
20
 Investors view each of the different investments represented by a probable
distribution of the expected rate of return over several holding periods.
 Investors always maximize the utility expected in a given period of time
 The investors assess the risk of the portfolio on the basis of the variance of the
expected return.
 Investors rely on the determination of profitability of risk and return
expectations. Therefore, their indifference curve is an equation of the expected
rate of return and variance (or standard deviation) of expected return.
 With a given level of risk, investors prefer higher expected return to lower
expected return. Similarly, with given level of expected return, investors prefer
lower risk to higher risk.
These assumptions are true for most investors and in line with reality. With the
assumption that Markowitz released, it will be easy for investors to build their own
suitable and effective investment portfolio
2.3.2. Steps of building portfolio regarding Markowitz theory

Applying method of Markowitz, investors build the investment portfolio by
following steps:
Step 1: Investors clearly identify the desired risk and risk-free asset as well as the
investment period.
Step 2: Investors conduct securities analysis, in particular to determine the expected
return, risk level and the correlation between the assets to be considered.
Step 3: Investors calculate the effective set of investment, using data calculated in
step 2.
Step 4: Determine the optimal portfolio to satisfy the specific investor (based on
risk aversion level of each investor)
2.3.3. Optimal investment portfolio and Efficient frontier

A portfolio is considered effective when the portfolio has the highest return relative
to the standard deviation given or the lowest standard deviation for the prevailing
rate of return. Effective portfolio has the trade-off between the highest rate of return
and risk. The combination of these is known as set of efficient effient portfolios.
Considering 2 cases of building efficient portfolio:
 Case 1: Given the expected return, determine the lowest risk portfolio
n n n
2
σ = ∑ wi2 σ2i + ∑ ∑ wi wj covi,j
i=1 i=1 j=1
2
 Find 𝜎 minimum with the following conditions:
21
𝑛
∑ 𝑤𝑖 = 1
𝑖=1
0 ≤ 𝑤𝑖 ≤ 1
∑𝑛𝑖=1 𝑤𝑖 𝐸(𝑅𝑖 ) = 𝑅𝑝 (given expected return)
 Case 2: With given level of risk, determine the highest expected return
portfolio
𝑛
𝑅𝑝 = ∑ 𝑤𝑖 𝐸(𝑅𝑖 )
𝑖=1
 Find 𝑅𝑝 maximum with the following condition

𝑛
∑ 𝑤𝑖 = 1
𝑖=1
0 ≤ 𝑤𝑖 ≤ 1
∑𝑛𝑖=1 𝑤𝑖2 𝜎𝑖2 + ∑𝑖𝑖=1 ∑𝑗𝑗=1 𝑤𝑖 𝑤𝑗 𝑐𝑜𝑣𝑖,𝑗 = 𝜎 2 (given risk)
 For each expected return, calculate the lowest risk portfolio (case 1). Varying
the expected return, which will have the lowest possible risk set of portfolios
 For each level of risk, a portfolio has the highest expected return (case 2).
Varying the level of risk, there will be a set of highest return portfolios.
 Combining the portfolios as in the above two cases, we will find the effective
portfolios
 Efficient frontier
The goal of modern portfolio theory is to find a set of all portfolios that make up
the efficient frontier. Efficient frontier includes all portfolios that fall between the
minimum variation portfolios and the maximum profit portfolio, called as the
efficient frontier. A list of minimum variables is the portfolio of minimum risk;
Portfolio maximum return is an effective portfolio of investments with the
maximum expected return. Although the maximum return portfolio also has the
highest risk for any portfolio in the efficient frontier, no other portfolio has equal or
greater returns and lower risk.
Graph 2.5: Efficient frontier
22
With the same level of risk, there will still be higherreturn portfolios. Therefore, the
smallest variance part (the dashed line) is not the effective way of gathering
portfolio. The straight curve of the minor standard deviation is the Efficient
Frontier.
Efficient Frontier is the path that connects all optimal portfolios in the coordinate
system, where the vertical axis is the expected return and the horizontal axis is the
standard deviation.
Graph 2.6: Interpreting the Efficient Frontier
23
From the graph, it is found that efficient frontier of the portfolios are the
aggregation of all higher return portfolios with the same risk, or less risk, with the
same expected return. Portfolios located on the curve to the left of the graph have
the highest expected yields with the same risk and the lowest risk with the same
expected yield.
In fact, there is no effective portfolios above the efficient frontier, as the efficiency
of the portfolio is not conducive to raising expected return without increasing the
standard deviation, and can not reduce the standard deviation without sacrificing
expected return.
Portfolios lying under the efficient frontier are less attractive than portfolios located
on efficient frontier, due to the same risk, the lower the rate, or the higher the risk
with the same return. It can be said, these are not effective portfolio.
2.3.4. Construct optimal investment portfolio

The determination of the optimal portfolio is as follows:
Determine the efficient frontier, the optimal portfolio is one of the portfolios lying
in that line.
Investors determine the level of risk aversion, know the trade-off between the
return and risk that investors are willing to accept.
Portfolio selected to meet the requirements of investors, in accordance with the risk
of investors and bring the highest level of utility.
Determine the optimal portfolio as well as find the effective portfolio which don’t
bringthe maximum return function or smallest risk. The objective function is the
utility function of investors, by other words, find the weighted allocation of
securities to get the investor’s utility reach maximum level
Algorithm model:
𝑛 𝑛 𝑛 𝑗
1
𝑈 = 𝑖 = ∑ 𝑤𝑖 𝑅𝑖 − 𝐴 [∑ 𝑤𝑖 𝜎𝑖2 + ∑ ∑ 2𝑤𝑖 𝑤𝑗 𝑐𝑜𝑣(𝑅𝑖 𝑅𝑗 )]
2
𝑖=1 𝑖=1 𝑖=1 𝑗=1
 Calculating the weighting of portfolios to maximize the utility value with the
following conditions:
𝑛
∑ 𝑤𝑖 = 1
𝑖=1
0 ≤ 𝑤𝑖 ≤ 1
∑𝑛𝑖=1 𝑤𝑖 𝜎𝑖2 + ∑𝑛𝑖=1 ∑𝑗𝑗=1 2𝑤𝑖 𝑤𝑗 𝑐𝑜𝑣(𝑅𝑖 𝑅𝑗 ) ≤ 𝜎𝑝2 (risk level that investor can accept)
24
Determine the weight of each of the securities in the portfolio, thereby determining
the distribution of their financial percentage allocation(%) in each security.
Thus, in Chapter 2, the author mentions the framework for porttolio, from the basic
definitions of return-risk, the relationship of return and risk, and the effect of
diversification of the capital market. Accordingly, non-systematic risk can be
reduced or even eliminated when investors diversify their portfolio. The Markowtitz
model provides assumptions from which to build efficient frontier. In that curve, the
set of portfolios which have the highest expected return on a specified risk, and the
lowest risk to the the given expected return,combined with the utility of individual Formatted: Strikethrough, Highlight
investors to determine the optimal investment portfolio.
25
CHAPTER 3. RESEARCH METHODOLOGY
3.1. Data collection and processing
Data is the adjusted price of the VN-Index and the price of steel stocks in Vietnam
Stock Market from 1 January 2016 to 31 December 2017
The writer collects historical price data of companies from public and official
sources about the Vietnamese stock market. Compile data collected using tools on
an Excel spreadsheet to divide it into data sets: Adjusted Price, Return, Correlation
Coefficients, and calculated Standard Deviations, Expected Returns, Factors Beta,
Rate of return and Utility.
Models to estimate expected return:
 Capital Asset Pricing Model (CAPM)
𝐸 (𝑅𝑖 ) = 𝑅𝑓 + 𝛽 𝑥 (𝑅𝑚 − 𝑅𝑓 )
Advantage of CAPM:
Deeply explain the relationship between risk and return, which gives investors a
complete view of the tradeoff between risk and return.
Simple, easy to apply in real conditions, useful for investors in: determining the
expected rate of return on the risk appetite, select stocks when the market low or
high.
However, the CAPM still has some drawbacks:
Restricted by many assumptions, when applying to practice some of the
assumptions are violated, the correctness of the model is affected.
Limited by two factors, the risk-free rate and the return of the market index and
ignored other factors.
Non-systemic risk affecting investors in reality
 CAPM model is the basis for the writer to use the stock selection in the relative
to risk. The CAPM is used because it is simple, easy to calculate and quantify
risk appetite of investors by selecting the Beta.
 Multi-factor model Fama-French
26
An empirical study by Fama and French (1992) showed that market risk is not a
good explanation for the change in return of stocks. Thus, Fama and French (1993)
proposed a three-factor model to complement the shortcomings of CAPM issues in
explaining the expected returns of stocks.
𝑅𝑖 − 𝑅𝑓 = 𝛼 + 𝛽𝑖 𝑥 (𝑅𝑚 − 𝑅𝑓 ) + 𝑠 𝑥 𝑆𝑀𝐵 + ℎ 𝑥 𝐻𝑀𝐿
Where:
𝛼: blocking factor
𝑅𝑖 : Return of security i
𝑅𝑓 : Risk free rate
𝑅𝑚 : Market return
SMB (Small Minus Big) and HML (High Minus Low): is the difference between
rate of return or B/P ratios of a small company and a large company, these two
measures the difference in the profitability ratio of small firms and large firms in the
market.
𝛽𝑖 , s, h: are macroeconomic variables, also 3-factor securities beta (distinct from the
CAPM's Beta)
In the Fama and-French study, high rate of return are a risk-reward advantage,
which means that the rate of return increases with the B/P ratio, The higher the B /
P, the more risky it will be
A large market portfolio will evaluate stocks on the ability to market on the market,
causing the size and value of the portfolio to be biased and therefore two additional
factors in the model correlate to these two problems. This is also the answer to the
fact that growth momentum can be used as another factor, the possibility of market
capitalization shows where the market is investing for a long time, while growth
momentum shows where copper money is invested. So if you want to take
advantage of the market effectively, you should start with the portfolios and then
adjust those portfolios accordingly.
This multi-factor model, appreciating the combined role of market Beta, scale, B/P,
financial leverage and book value ratio on the market value of equity in the sample
of Average return on stock market NYSE, AMEX and NASDAQ.
This model can be said to be suitable for the Vietnamese market model with the
majority of medium and small companies.
 This is considered a model to increase the applicability and accuracy when
combined with the Markowitz model in the construction of the portfolio.
3.2. Optimal portfolio construction process for Vietnam’s steel industry

With the basis of the snow described in Chapter 1 and Chapter 2, the purpose is to
provide a practical and concrete view of the development of the portfolios using the
27
Markowitz theory and utility theory. To build a successful portfolio, investors must
follow the specific procedures:
Step 1: Analyze the Vietnamese stock market and steel market in 2017 and 2018
Step 2: Select the steel companies listed in the portfolio
Step 3: Calculate historical return and risk of stocks
Step 4: Calculate the expected return based on CAPM
Step 5: Calculate the expected return and risk of the portfolio.
Step 6: Develop a model to determine the proportion of stock allocation in the
portfolio
Step 7: Construct an optimal portfolio for each investor’s requirement
28
Formatted: Left, Space After: 0 pt
CHAPTER 4. RESEARCH RESULTS
4.1. Vietnam’s steel industry overview in 2017 and prospects for 2018
4.1.1. Vietnam Steel industry in 2017

Vietnam steel industry in 2017has a high level of price competition, leading to the
cost of production become factors to select potential enterprises.
The price of steel materials has increased sharply recently. Iron ore and coke are the
two biggest gainers, leading to other commodities such as scrap steel and semi-
finished products, HRC and steel billet, which pushed up production costs.
According to Decision 2968 of the Ministry of Industry and Commerce on the
imposition of additional self defenseanti-dumping tax, creating opportunities for Formatted: Strikethrough
domestic steel enterprises to increase sales and sales prices. As a result, in the first
six months of 2017, most steel mills reported surging profit. However, not every
enterprise has real sustainable growth.
 Price of raw materials
Iron ore
In November 2017, iron ore prices rebounded strongly from the bottom of $40
/tonne to nearly $ 80/ton. The volatility was divided into three phases, rebounded in
the first half, stabilized again and strongly increased at the end of Quarter 3.
Strong recovery in the first six months of 2016 thanks to hoarding. Iron ore
contracts surged by a whopping 500 million tonnes per day, extending from
February to April, pushing iron ore prices from $ 44/tonne to $ 66/tonne. After
inventories finished, iron ore prices fell sharply back to $ 50-55/tonne in Q3/06,
reflecting the true supply situation of the market.
After going flat for several weeks at $ 50-55/tonne, iron ore prices continue to rise
sharply in 4/2017. Iron ore prices soared to $ 80 per tonne. At the end of the year,
Chinese companies start stockpiling materials for the first quarter of 2017, leading
to a surge in inventories at ports, which are now close to their peak levels in 2016-
2016, reaching 110 million tons.
29
Coal:
The global coal supply tightened, resulting in a sharp increase in coal prices.
Specifically, from August to November 2017, the price of coking coal
(metallurgical) increased by nearly three times, reaching over $ 300 / tonne,. $ 50
up to nearly $ 110 per ton. The first came from the fact that China actively cut coal
production capacity, secondly, unstable weather conditions, humid environment and
heavy rainfall caused production to stagnate at coal mine sites of Indonesia and
Australlia. The cause also comes from North American production (the world's
fourth largest producer), down nearly 50% in the six months to 2017.
The domestic coal price has not been adjusted much, the Vietnam Coal and Mineral
Group (Vinacomin) announced a 6% increase in domestic coal price for coal dust
types 1, 2, 3, 6 and 7a/b/c. (thermal coal). Domestic coal price is slightly adjusted as
domestic prices are still higher than world prices.
Steel materials (semi-finished products)
Other raw materials have fluctuations about 1-2 months later than iron ore. Typical
steel scrap and HRC. The delay is due to the fact that these materials are semi-
finished products processed from iron ore and coke, so the price fluctuation of these
products will depend on the inventory cost of the steel enterprises. Instead, it
depends directly on the price of raw materials in the market.
 Market situation of steel
The steel industry enjoyed a strong growth in both production and consumption
compared to 2016, especially in March when it decided to impose additional
temporary safeguard duties on steel bars and billets of the Ministry of Industry and
Trade promulgate. Construction steel consumption growth of 21.5% in October
2017 reached 6.44 million tons. However, the surge in steel consumption comes
from the speculation of steel dealers before the decision to impose a temporary
safeguard come into effect, not from the real demand of the market.
Graph 3.1: Vietnam Steel Industry growth and market share
30
Source: BMI
Steel prices rebounded strongly in June 2017 for reasons, firstly because of the
additional self-defense taxanti-dumping tax of up to 15% for bar steel and 24% for Formatted: Strikethrough
imported steel. The second reason is that raw material prices including scrap steel,
iron ore and coking coal have risen recently as China plans to cut output, leading to
higher production costs. Selling prices increased significantly, but the consumption
capacity is showing signs of slowdown compared with the previous months.
Steel products increased 31.7%, reaching 1.52 million tons. Steel pipe prices also
tend to increase recently as demand from industry and construction is entering the
finishing stage, and hot rolled coil (HRC) prices rise.
31
Plating steel consumption increased 34.1% to 2.29 million tons, of which more than
1 million tons (+ 42.7% yoy). Corrugated steel consumption increased sharply,
mainly in export markets (+ 42% yoy) and the southern market (+ 32% yoy). In
particular, Vietnam's main steel sheet import market is mainly ASEAN (43.8%),
USA (35.15%). Particularly, the production in the US in September 2017 increased
21 times over the same period, reached 707,700 tons.
Imports of finished steel products, though still high, have shown signs of slowing
down. Self-defense tariffsAnti-dumping tax have been partly effective as import Formatted: Strikethrough
growth has slowed. Specifically, according to data from the General Department of
Customs, imports of all types of steel in October reached 1.5 million tons decreased
3.3% (+ 18.8% yoy). Accumulation in October reached 15.4 million tons (+ 24.2%
yoy), the growth rate has gradually decreased over the months.
Imports of steel billets slowed down in the beginning of the year, imports of steel
scrap decline. The high price of steel scrap has led the electric furnace businesses to
switch to cheaper ingot steel from China.
 Business result of steel companies
Electric steel furnace and civil steel trade have sudden growthdue to a sharp fall in
earnings. Generally in 2016, scrap steel prices fell more slowly than iron ore prices,
There are higher production costs than blast furnace businesses. Steel traders do not
adjust inventory policies, maintain inventory levels for up to 4-6 months of
consumption, and steel prices drop resulting in large inventory costs.
High-grade steel furnace enterprises increased from the inside. Blast furnace
businesses have a low cost of production, and the first advantage is the long-term
inventory cycle, which helps the company's margins expand as raw material prices
increase. The second advantage is that the blast furnace technology allows for the
production of cheap embryos, which compete with Chinese goods after the
additional safeguard tax is enforced. The growth of blast furnace steel enterprises
reflects the actual situation of business enterprises.
 Reaction of steel companies due to votalityvolatility of material prices Formatted: Strikethrough
In Vietnam, there are 3 major influences on the construction steel market, including
blast furnace steel companies, electric furnace steel companies, and imported steel.
The steel market has a very high price competition because the domestic steel
industry is not diversified in products, concentrating too large resources on some
main products including construction steel, steel pipe, galvanized steel. Secondly,
China is in a state of supply, continuously launched policies to support the export of
cheap steel to Vietnam. Thirdly, the cost to customers switching between steel
suppliers is very high.
There are several options to be selected by steel companies with the price
fluctuation:
- How the blast furnace business chooses to defend or increase derivatives
capacity.
- Electric furnace enterprises change flexible embryo sources
32
- Reinforced plated enterprise
4.1.2. Prospect of Steel industry in 2018

Price prospects:
 Iron ore is expected to decline due to:
Iron ore consumption in China is on a downward trend recently as the steel industry
is under supply and tends to shift to electric furnace production.
Major exporters in Australia and Brazil are increasing their capacity to compete for
more market share, and the two big countries shaking hands to cut output to support
prices is not high as both countries have The ability to exploit iron ore at a low cost.
Iron ore inventories in China are approaching the old peak in 2014-2015
Coke is projected to decrease as supplies improve again in Australia - Coal prices
continue to remain high
Scrap steel scrap with iron ore and coke
 Construction steel price forecast 2018
The electric furnace businesses will increase the import of billets from China if the
price of scrap steel reaches USD 280USD /ton, this trend will reverse when the
price of steel scrap starts to fall below USD$ 222/ton.
The average selling price of steel in 2018 should be maintained at a minimum level
of about 10.8 million VND/ton. It can be seen that the price of steel increased
mainly due to increased production costs and the increase in the dollar, causing the
cost of imported iron ore and scrap steel increased.
 Industry outlook
Construction steel:
The construction market continues to be buoyant. In addition, the private equity
cycle will return when the government cabinet has stabilized, boosting demand for
steel. Steel Association of the world forecast, the steel market in the ASEAN
(including Thailand, Malaysia, Vietnam, Indonesia, Philippines) will continue to
grow by about 6%.
Steel prices are forecasted to increase next year, but the effect will be differentiated
with:
- Average cost of raw materials increased
- At present, domestic companies still have their source of raw materials
cheap to produce
On the margin side, electric furnace businesses will face more difficulties than blast
furnace businesses. Specifically, the electric furnace businesses will tend to import
steel billet and be subject to import tax of 30%, production costs approximate
expected selling price.
33
Formosa is expected to be operational in January 2017. If Formosa sells steel to the
domestic market, the electric furnace businesses will benefit from the availability of
cheaper imported non-tariff billets and increased competition from the blast furnace
business.
Plated steel - Steel
The steel pipe market is quite attractive, but the scale is quite small. Steel pipe can
be considered as a commodity associated with construction steel by application in
scaffolding design to support the construction process and foundation of the
building.
The domestic market is still developing. The demand for housing is expanding, the
population is growing rapidly and the rate of urbanization at high level creates a
great demand for iron products.
In addition, the benefit from the decision to impose anti-dumping duty on coated
steel products (1/9/2017 by the Ministry of Industry and CommerceTrade) will
create barriers to Chinese products, giving advantages to Domestic firms increase
market share and domestic consumption. Of which, the anti-dumping tax rate is
applied from 4.02% to 38.34%.
New markets opened in the US are experiencing political instability and the risk of
trade liberalization is quite large, affecting export competitiveness and indirectly
increasing domestic supply.
 Conclusion: The analysis can see the positive aspects of the steel industry in Formatted: Font: Not Bold
2017. In addition to the risk of cheap imported steel, especially from China,
there are also challenges from trade remedies from the export market. Thus, the
domestic steel production has met the demand of construction steel, cold rolled
steel, steel pipes, metal plates and paint coatings. Overwhelmingly, installed
capacity has exceeded consumption by about 50%. The rest, Vietnam still have
to import steel types such as hot rolled steel, sheet steel, alloy steel. In the
context of many plants not running at full capacity, the investment in , additional Formatted: Font: Not Bold
of plants into the planning is a matter of conflict. By the end of 2017, the steel Formatted: Font: Not Bold
industry will continue to trade billions of dollars. Iron and steel are among the
top 5 most exported commodities in 2017. The country spends more than $
USD8 billion to import iron and steel. A number of steel mills have difficulty Formatted: Font: Not Bold
facing increased anti-dumping duties. If the US applies anti-dumping duty up to
nearly 200%, Vietnamese businesses must pay a tax of nearly 500% when
exporting to this market.
 However, in FY2018, the steel industry is expected to grow at a good 12%.
Therefore, in order to support the development industry, Mr.HoNghiaDung,
President of VSA, said that in 2018, besides continuing to comment on policies
for the steel industry, trade defense to protect production, VSA will also monitor Formatted: Font: Not Bold
the market of raw materials and semi-finished products that directly affect the
domestic market such as iron ore, scrap steel, billet, steel sheet, hot rolled coils.
From those signs, it is clear that the steel market is still a place for investors to
pay attention and seek profits.
34
4.2. Picking and aAnalysing Steel industry stock available in investment portfolio
The Portfolio portfolio includes 10 stocks in steel industry:
1. HPG HoaPhat Group JSC

2. HSG HoaSen Group
3. DTL Dai ThienLoc Corporation
4. TDS Thu Duc Steel JSC
5. TLH Tien Len Group JSC
6. VIS Viet Y Steel JSC
7. KKC Produce & Trading Metal JSC
8. VGS Vietnam German Pipe Steel JSC
9. SSM Steel Structure Manufacture JSC
10. SMC SMC Trading Investment JSC
4.3. Empirical return and risk of stocks and VN-INDEX from 1/1/20165 to Formatted: Highlight
31/12/2017 (khoảng thời gian này không nhất quán với Chapter 1) Formatted: Highlight
The price has been adjusted according to such issues as issuing additional shares to
existing shareholders, issuing ordinary shares, paying stock dividends. Because of
these effects, the price changes but not the real return. Price adjustment in
accordance with the rate to indicate the price change is due to fluctuations in supply
and demand on the market and say the correct profit/loss of shares. For the above 10
stock codes, prices are adjusted when there are occurrences. Price information is
updated from VNnDIRECT Securities.
4.3.1. Empirical return

EmpiricialEmpirical return of stocks come from two sources: Dividend and price
difference. Assume to ignore dividend income in the model and pay attention only
to the profit from the difference.
Daily return:
𝑃𝑖𝑡 − 𝑃𝑖𝑡−1
𝑃𝑖𝑡−1
Where:
𝑃𝑖𝑡 : Price of stock i in day t
𝑃𝑖𝑡−1 : Price of stock i in day t-1
35
Yearly return: Total trading days = Total days in year –total holidays and weekends
 Number of trading days: 250
𝑃𝑖𝑡 − 𝑃𝑖𝑡−1
𝑥 250
𝑃𝑖𝑡−1
4.3.2. Empirical risk (standard deviation)

Due to data collection is just samples of a population, therefore the equation to
calculate variance (or standard deviation) used here is the equation for sample
variance (standard deviation)
∑𝑇
𝑡=1(𝑅𝑡 − 𝑅)
2
 Variance: 𝑠 2 =
𝑇−1
∑ (𝑅 − 𝑅) 𝑇 2
 Standard deviation: 𝑠 = √ 𝑡=1 𝑡
𝑇−1
 After calculating the empricial return, the result does not show any stock
ticker for negative return. Of which, HPG, DTL, SMC, VIS, VDT are quite
high. This can be explained by HoaPhat Group Joint Stock Company, Dai
ThienLoc Joint Stock Company ... are companies with large market share.
The company is multi-industry, not only the steel production sector, so
clearly the return is always high.
4.4. Expected return of each stock in investment portfolio

Equation for calculating expected return:
∑𝑇𝑡=1 𝑅𝑖
𝐸 (𝑅 ) = 𝑅 =
𝑛
In fact, there are companies with negative rate of return, so when based on those
results to predict future returns, there is no meaning. That is, investors do not
benefit but also lose. To overcome this conflict, one uses the CAPM model to
determine the expected return:
𝐸 (𝑅𝑖 ) = 𝑅𝑓 + 𝛽 𝑥 (𝑅𝑚 − 𝑅𝑓 )
Where:
𝐸(𝑅𝑖 ): Return of security i
𝑅𝑓 : Risk free rate
𝑅𝑚 : Market return
𝛽𝑗 : Beta refers to the relationship between the return of a security and the return of
the whole market. The beta of systematic risk measurement of stocks, the larger the
beta is, the more vulnerable it is to market fluctuations.
36
To calculate 𝐸 (𝑅𝑖 ), we need to calculate factors in Capital Asset Pricing Model
 Calculate 𝑅𝑚 : Assume stocks in VN-INDEX presents the market portfolio.
Based on the empricial data from 1/1/2015 to 31/12/2017, 𝑅𝑚 is equal
10.03%
 Calculate 𝑅𝑓 : Take the yield on Vietnam Tresury Bond with 10-year
maturity, 𝑅𝑓 is equal 4.33%
 Calculate 𝛽:
𝑐𝑜𝑣𝑖,𝑚 𝜎𝑖
𝛽𝑗 = 2
= 𝜌𝑖,𝑚 𝑥
𝜎𝑚 𝜎𝑚
Table 4.1: Beta factor and expected return of stocks
No Stock Beta Expected return (%)

1 HPG 1.11 10.66
2 HSG 0.75 8.61
3 DTL 0.18 5.36
4 TDS 0.03 4.50
5 TLH 0.69 8.26
6 VIS 0.73 8.49
7 KKC 0.20 5.47
8 VGS 0.73 8.49
9 SSM 0.76 8.66
10 SMC 0.17 5.30
Factor β <1: The probability of a change in the price of the stock is equal to the
market price. However, for stocks with Beta ratios of approximately 1, we can say
that they are sensitive to market volatility. For stocks with negative beta , it is
possible to understand that Beta is measured by the risk of an asset being added to a
diversified risk portfolio. As such, an investment that is included in a portfolio risks
the entire portfolio down, with negative beta. In other words, negative beta is a
premium when the macro-economy causes a bad influence on the portfolio. Bonds
have negative beta coefficients, but these are the results of what happened during
the trouble times of the market.
Factor β = 1: The volatilityvotality equal to votality of the market
Factor β > 1: Stocks have volatilityvotality larger than volatilityvotality of the
market, which is considered to be very sensitive to the fluctuation in the market
37
4.5. Expected return and standard deviation of investment portfolio
4.5.1. Expected return of investment portfolio
When the weight of stocks in portfolio is defined, it will be easy to calculate
expected return of portfolio with the equation:
𝑛
𝐸(𝑅𝑝 ) = ∑ 𝑤𝑖 𝐸 (𝑅𝑖 )
1
 With steel industry, assume that weight in investment portfolio of each stock
is equal and equal to 10% (𝑤𝑖 = 0.1)
Table 4.2: Expected return of stocks in portfolio when equally weighted
No Stock Expected Weight Return of each stock

return (%) in portfolio (%)
1 HPG 10.66 0.1 1.066
2 HSG 8.61 0.1 0.861
3 DTL 5.36 0.1 0.536
4 TDS 4.50 0.1 0.450
5 TLH 8.26 0.1 0.826
6 VIS 8.49 0.1 0.849
7 KKC 5.47 0.1 0.547
8 VGS 8.49 0.1 0.849
9 SSM 8.66 0.1 0.866
10 SMC 5.30 0.1 0.530
 Expected return of the portfolio: 𝐸(𝑅𝑝 ) = 7.4%

Therefore, with equally weighted portfolio the the weight equal 10%, the Formatted: Strikethrough
expected return of the portfolio is 7.4%
4.5.2. Risk (Standard deviation) of investment portfolio

Based on the standard deviation of each stock in portfolio, the correlation
coefficient between each stock is calculated
Table 4.3: Correlation among stocks in portfolio
38
HPG HSG DTL TDS TLH VIS KKC VGS SSM SMC
HPG 1.000 0.560 -0.051 0.030 0.288 0.229 0.111 0.150 0.027 0.217
HSG 1.000 -0.106 -0.017 0.467 0.228 0.167 0.070 0.077 0.308
DTL 1.000 -0.071 0.002 0.130 0.114 -0.014 0.084 0.063
TDS 1.000 0.031 -0.047 0.089 0.029 -0.068 0.034
TLH 1.000 0.272 0.185 0.080 0.091 0.280
VIS 1.000 0.227 0.035 0.037 0.159
KKC 1.000 0.053 0.054 0.074
VGS 1.000 0.011 0.078
SSM 1.000 0.069
SMC 1.000
From the data calculate of the return on the trading day of the securities. Using
functions in Excel will generate the covariance matrix. It is easy to see that almost
all securities in portfolio are neutral correlation. As the investment activity is
influenced by macro factors, crowd psychology, the securities almost always
change in the same direction. For pairs of securities with negative correlation
coefficients, the expected values always move in opposite directions.
4.6. Optimal portfolio construction for individual investor

Determine risk aversion level A for each investor using the questionnaire (detailed
seein appendix)
The objective is to identify 1 portfolio in the efficient frontier to meet expected
return and acceptable level of risk of investors. As a result, investors will set up
their own portfolio. As mentioned in Chapter 1: From the level of risk aversion, it is
easy to calculate the proportion of investment in stocks that investors can maximize
the utility.
Identify the degree of risk aversion
- A = 5: very high risk aversion
- A = 4: high risk aversion
- A = 3: medium risk aversion
- A = 2: low risk aversion
39
- A = 1: very low risk aversion
Once you have identified the level of risk aversion of investors, use the Solver tool
in Excel to determine the stock exposure in the portfolio. This is a good tool to find
the solution to the optimal problem, with constraints under specific conditions, this
tool will give the most reasonable allocation based on the conditions and baseline
data. In the case of the study, the Solver tool calculates the proportion of investment
securities based on data on the securities, maximum utility, percentage of
investment greater than or equal to zero, and the have sum equal 1, another
condition is the investor's estimated risk level.
 Case 1: Investor has high risk aversion level

After using questionairesquestionnaires to identify the risk aversion level A = 4
(this is the number that define the risk aversion of investor is quite high, investor is
not willing to take the high risk investment option)
Investor just accepts the risk of portfolio (variance): 𝜎 2 ≤ 11.00
𝑛 𝑛 𝑛 𝑛
𝑈 = ∑ 𝑤𝑖 𝑅𝑖 − 0.005 𝑥 4 𝑥 [∑ 𝑤𝑖2 𝜎𝑖2 + ∑ ∑ 2𝑤𝑖 𝑤𝑗 𝑐𝑜𝑣𝑖,𝑗 ]

𝑖=1 𝑖=1 𝑖=1 𝑗=1
 Find the weight of stocks to maximize U with the following condition:

𝑛
∑ 𝑤𝑖 = 1
𝑖=1
0 ≤ 𝑤𝑖 ≤ 1
𝑛 𝑛 𝑛
(𝜎𝑝2 = ∑ 𝑤𝑖2 𝜎𝑖2 + ∑ ∑ 2𝑤𝑖 𝑤𝑗 𝑐𝑜𝑣𝑖,𝑗 ) ≤ 11

𝑖=1 𝑖=1 𝑗=1
Table 4.4: Stocks weight in optimal portfolio when A = 4
No Stock Weight (%) Risk aversion Variance Expected

level return (%)
1 HPG 0.06 A=4 11.0 5.96
2 HSG 5.42
3 DTL 86.02
4 TDS 1.84
5 TLH 0.00
40
6 VIS 0.00
7 KKC 0.00
8 VGS 6.65
9 SSM 0.00
10 SMC 0.00
Graph 4.1: Stocks weight in optimal portfolio with A = 4
90.00% 86.03%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
5.42% 6.65%
10.00%
0.06% 1.84% 0.00% 0.00% 0.00% 0.00% 0.00%
0.00%
HPG HSG DTL TDS TLH VIS KKC VGS SSM SMC
 Observation:
With the risk aversion level A = 4, this is the investors who are afraid of risk, they
do not accept high risk investments and high volatility stocks. Results of investment
allocation are shown in table, the proportion of investment in DTL stock is
86,032%. In the context of steel industry in Vietnam, DTL stock prices are not high
but the numbers are quite good and always maintain stable level, without the strong
fluctuations.
- The share of remaining shares is below 10%. As for blue-chip stocks in the steel
industry such as HPG, HSG is quite low, specifically the proportion of HPG is
0.059% and HSG is 5.423%. These are two leading corporations in Vietnam with
impressive business results, however, stock prices have fluctuated sharply in the
years. Large and frequent fluctuations in prices caused the two stocks to have high
risk and low proportion of investment. 2017 is considered as a year of many
obstacles to the steel industry in Vietnam, the price of steel fluctuates large price
when the price of steel imported from China makes a great deal with the domestic
41
enterprises. Market fluctuations strongly impact stock prices of companies. VGS
stock in 3 years have the price not high, but always maintained stability from the
beginning, with the business situation of the company achieved many good results.
The percentage calculated according to the portfolio is calculated as 6.646%. TDS's
weigtweight is 1.840%, although the price of TDS is quite low but less risky since
TDS is always stable at the beginning.
- There are even shares of portfolio considered 0.00% of TLH, VIS, KKC, SSM and
SMC, meaning that investors should not put these stocks in their portfolio.
- According to optimal portfolio, investors should remove SMC's shares from the
list, for example SMC's stock price is not low but the price has fluctuated strongly.
When reviewing the financial statements, the company encountered difficulties in
taking forex risk on trading and buying transactions in currencies other than VND,
the currency risk was close to USD 17 million USD equivalent to ~ VND 389
billion VND. The Company's exposure to credit risk also arises mainly from
receivables from customers with bad debts up to ~ VND102 billion dong. After
considering the financial status of the company, in 2017 should not invest in SMC
shares.
 Case 2: Investors have low risk aversion level

When investors have low risk aversion level A = 1, that means investors are willing
to take high risk investment (variance) 𝜎 2 = 70
𝑛 𝑛 𝑛 𝑛
𝑈 = ∑ 𝑤𝑖 𝑅𝑖 − 0.005 𝑥 1 𝑥 [∑ 𝑤𝑖2 𝜎𝑖2 + ∑ ∑ 2𝑤𝑖 𝑤𝑗 𝑐𝑜𝑣𝑖,𝑗 ]

𝑖=1 𝑖=1 𝑖=1 𝑗=1
 Find the weight of stocks to maximize U with the following condition:

𝑛
∑ 𝑤𝑖 = 1
𝑖=1
0 ≤ 𝑤𝑖 ≤ 1
𝑛 𝑛 𝑛
(𝜎𝑝2 = ∑ 𝑤𝑖2 𝜎𝑖2 + ∑ ∑ 2𝑤𝑖 𝑤𝑗 𝑐𝑜𝑣𝑖,𝑗 ) ≤ 70

𝑖=1 𝑖=1 𝑗=1
Table 4.5: Stocks weight in optimal portfolio when A = 1

No Stock Weight (%) Risk aversion Variance Expected
level return (%)
1 HPG 0.06 A=1 70.0 5.96
2 HSG 5.42
3 DTL 86.02
42
4 TDS 1.84
5 TLH 0.00
6 VIS 0.00
7 KKC 0.00
8 VGS 6.65
9 SSM 0.00
10 SMC 0.00
With a risk aversion of A = 1, it is a risky investor and willing to accept high risk
investments. Assumptions variance for this investment are is70%, a very high level
of risk. However, the results obtained when using the solver function to determine
the proportion of investment allocation, almost no change, in particular changes but
very small and negligible.
It can be said that the results are very contradictory when the risk appetite increased
significantly (70%) but the proportion of reallocation has not changed. The
explanation for this is that Vietnam's steel market in 2017 is in a state of
inefficiency. In the first 7 months of 2017, Vietnamese steel enterprises must
compete with imported steel. Heavy steel rushes into the domestic market, causing
many local steel producers to face difficulties.Thedifficulties. The market share is
narrowed. Meanwhile, new steel production only reached 60% of capacity, many
businesses have to temporarily stop production, workers do not have enough jobs.
The steel industry is not optimistic, inevitably that the price of steel companies are
not stable. The fluctuation of the steel market caused the price of steel stocks to be
seriously affected, even the leading companies could not keep the price in the low
risk. Investors can take high risks but can not with all risks, it is possible that the
expected profits increase but can not offset the risk of falling prices. Therefore, the
top choice for investors in the crisis period of the steel industry are stocks with little
fluctuation, which may not be high or even low compared to many other stocks, but
the risk will be reduced.
Formatted: Vietnamese
43
CHAPTER 5. CONCLUSIONS ANDCONCLUSIONS
AND
RECOMMENDATIONSRECOMMENDATIONS
AND CONCLUSIONS
5.1. Conclusion for the final optimal portfolio for steel industry in Vietnam Formatted: Vietnamese
(emđãthêmphầnnàylàkếtluậncủakếtquảnghiêncứunhưcônhậnxét ạ, phầnsaucủa chap Formatted: English (United Kingdom)
nàysẽlàcácđềxuất ạ, cònphần conclusion cuốilàtổngkếtlại ạ) Formatted: Vietnamese

The research result has constructed optimal portfolios of 5 stocks taken from 10 Formatted: Normal, Left, None, Space After: 0 pt,
No bullets or numbering
stocks in the sample of steel stock industry in Vietnam. From the perspective of an
individual investor, level of risk aversion has been taken into account to build the
portfolio which provide the maximum utility for each investor. The portfolio would
be used for the investment purpose for the period of 2018. If there are any
significant changes in macro economics in general or Vietnam steel industry and
each stock in portfolio itself in particular, the portfolio should be rebalanced
regarding the influence of those events.
An noticeable point is that, in the process of constructing the optimal portfolio that
maximize investor’s utility level, regarding the level of risk aversion of each
investor or in other words, either an individual is a risk-seeker or a risk-averse
investor, the results for an optimal portfolio of Vietnam steel industry are the same.
The application of Markowitz model and utility theory to the construction of an
investment portfolio is proved to be suitable for each investor in an ideal securities
market. Formatted: Font: (Default) Times New Roman, 13 pt
44
5.1.5.2. Problems encountered in thewhen applicationthe application ofying
Markowitz model
There are important notices about Markowitz's portfolio theory:
 The portfolio theory is referred to as a two parameter model, because it
assumes that the investment decision is based on only two parameters:
expected rate of return and standard deviation (expressed risk).
 The Markowitz model creates a set of effective portfolios. On efficient
frontier, no portfolio is better than others. Selecting the portfolio is entirely
dependent on risk averse level of each specific investor.
 Each investor has a set of input parameters, which means the rate of return,
standard deviation, correlation coefficient for the Markowitz model is
different, so the efficient frontier of each investor is different. This is related
to the success of the selection of the portfolio in realiaty depending on the
quality of the input parameters.
 The Markowitz model requires a large amount of input parameters. In
addition, the possibility of error is very large when implementing many
formulas. The more stocks the portfolio include, the more cumbersome the
model is. Therefore, it also reduces the accuracy of efficient frontier
construction.
 The Markowitz model requires investors to anticipate possible fluctuations in
the return of the stocks in the future. However, this is quite difficult for
Vietnamese investors when the domestic securities market is not highly
reliable. The source of financial information is not fully disclosed and
asymmetric information occurs. Therefore, it is unlikely that the investor will
be able to make their forecast.
5.2.5.3. Practicality of Markowitz model

On a practical aspect, with each economy and political situation in specific markets,
specific research results will be produced. In the Vietnamese stock market, when
applying the Markowitz model, it has the following limitations:
• Determine the proportion of assets invested in the DM
In order to create effective EMI, investors must have the flexibility to change the
proportion of investment allocation to the target as well as the financial situation.
However, there is a restriction, that is the stock transactions are calculated in
batches. Lots of transactions must be 100 shares, causing investors have difficulty
in dividing the first proportion in the list. It is difficult for the investor to be able to
achieve the expected allocation when performing batch transactions.
 Transaction costs when buying/selling assets
Investors will have to pay a certain fee for their transaction. Each securities
company applied a separate fee, ranging from 0.15% to 0.3% of total trading value.
This may cause psychological hesitation to change the proportion of investors,
45
leading to the lack of flexibility in changing the proportion to achieve the desired
profit.
 The market is lacking in transparency
The current stock market in Vietnam is not an effective market. The market has no
control over the information asymmetry between the parties. It is the situation while
trading a party does not know the informationorinformation or less information than
the other party. The transparency, professionalism and respect of shareholders of
listed companies have not been respected. There are many websites that provide
information that is not up-to-date, making it difficult for investors to understand the
business activities. At the same time, the failure to organize information disclosure
also causes businesses to lose trust from investors, affecting the position of
enterprises in the stock market, causing lack of confidence of investors in the
market. So, when investorschoose stock invest in Vietnam stock market, they Formatted: Strikethrough, Highlight
always have to consider the information asymmetry. This is an obstacle to the
application of the Markowitz model to the Vietnamese market.
 Inadequate investment instruments
Portfolio of domestic investors has not diversified. The share ratio is several times
higher than the bond and can be said to be 0% for real assets. Demonstrating from
the reality shows that in a narrow financial instrument in portfolio, the financial
instruments that are related to each other will of course not achieve the
effectiveness of the diversification of the portfolio. As such, the portfolio will lack
the benefits of diversification and will not be as successful as the expecteation of
investors.
 If considering Vietnam stock market, applicatble of Markowitz theory and
the utility theory is difficult to reflect the practical as well as not fully
promote the application of the model. The above limitations strongly
influence the accuracy of the model results. The stock market in Vietnam is
not really stable and lack transparency, making it difficult for investors to
anticipate the level of risk they are willing to accept.
5.3.5.4. Improving practicality of optimal portfolio theory for Vietnam’s Steel

industry stocksin Vietnam securities market
5.3.1. Vietnam’s Steel industry Evaluation in 2017 em nêu phần này ở đây để
làm gì? Có lẽ nên đưa vào mục “4.1.1. Vietnam Steel industry in 2017”
In general, the business situation of Vietnam steel market in 2017 did not achieve
good results. The overall domestic steel industry is under extremely severe pressure
because the total domestic steel production is about 15 million tons, accounting for
over 50% of the country's total consumption. Tthe rest is steel imports account for
over 40%. In 2017, the investment for the construction of bridges, roads ... does not
have the advantage of low construction steel. In addition, the export volume of steel
is reduced because of the pressure from anti-dumping lawsuits dense, making
46
Vietnam steel into the country very difficult. Another weak point is that most
manufacturing enterprises are still small in scale, production technology is only
medium in the world and most of them are only at the end of the value chain. Other
mills, which depend mainly on semi-finished materials, are steel billets imported for
production so the profit margin is strongly influenced by fluctuations in world
prices. Thus, the steel industry difficult in 2017, led to large price fluctuations in
enterprises in this field. Stock prices of companies are difficult to stabilize, thereby
increasing the risk that investors feel nervous when making investment decisions.
Risk aversion or risk aversion also tends to avoid stocks with high price differences,
and often choose stocks with less volatility, although the chances of profitability
may be lower. The steel industry is disadvantageous in production and business, the
profit decline, will directly affect the stock price as well as investment decisions of
investors, this is quite disadvantage for companies with attractive prices but high
risk as well.
5.3.2.5.4.1. Building an efficient information system

Some measures to improve the information system,whichsystem, which are
inefficient on the Vietnamese stock market.
 The content presented in the report of companies listed on the stock
exchange must ensure the quality in accordance with the regulations. All
items must be clear and detailed about the activities of the company.
Enterprises must commit to disclose information of high quality without
having to falsify documents before leaking information. Information reaches
every market participant at the same time, transparent and fair. Companies
participating in the stock market or not participating in the stock market shall
periodically disclose information to ensure clean competition.
 "Credit Rating" is a concept not unfamiliar to the investment industry. Credit
Rating Agency (CRA) is companies which provide score on the credibility of
a business in its financial obligations. The development of rating agencies
helps investors to have a basis for reference and comparison before making a
decision on what tools to invest. Because CRA products are providing the
market with a ranking system for financial instruments, especially debt
securities. It is very beneficial for the issuers of securities to be rated
creditworthy. They will have the opportunity to access reliable sources of
information as a basis for accurate investment decisions. On the other hand,
investment advisory services of securities companies will become more
professional with the support of credit rating agencies.
5.3.3.5.4.2. Financial instrument dDiversifying financial instrumentsication

ininstruments in Vietnam’s financial market
The current status of Vietnam's stock market is still limited by the use of basic
financial instruments such as stocks, government bonds, treasury bills, in which the
proportion of investment in stocks is the largest. If portfolio only includes assets of
47
such high correlation, then the effectiveness of portfolio diversification can not be
achieved. It is easy to see if investing in the same type of tool, portfolio can not
reduce the risk whether the market fluctuates better or worse. For example, the
portfolio is comprised of all the shares of processed food companies. If the price of
raw materials increased suddenly, resulting in a drop in profits, investors will be
afraid of the financial situation of the companies. Investors invest in shares for the
purpose of making profit or loss when holding shares, so if there is a bad situation
happening with the financial situation of the company will certainly affect the stock
price. Or maybe the company will not be able to pay dividends. But if portfolio is
diversified with stocks in other sectors or investment in other financial instruments,
it will not be influenced by rising or decreasing food prices, which increases the
benefits of diversification. In order to diversify the variety of investment
instruments, the Vietnamese market must develop the whole economy in general
and the finance and securities sector in order to diversify the financial instruments.
 Diversification of bonds: government bonds, local bonds, corporate bonds,
construction bonds, convertible bonds. According to the actual study,
Vietnam's bond market is dominated by government bonds and a small
number of corporate bonds. Almost all listed companies make capital raising
via issuing shares, while bonds are used to raise capital only in a number of
large enterprises with stable business.
 Boosting Promotingthe corporatePromoting corporate bond market:

Encourage businesses to issue bonds with tax advantage policy
If the companies wants to issue shares to raise capital, it should be provided for the
proposed capital structure to be submitted to the Board of Trustees of Vietnam
Government for approval.
Create favorable conditions for investors to find the bond market, from
theregraduallythere gradually become a concern for investors to invest in bonds. At
present in the Vietnamese market, the new change in issuance of corporate bonds in
individual form has increased the autonomy of enterprises in the issuance of bonds.
Protecting the interests of investors as well as creating favorable conditions for
enterprises to take the initiative in issuing bonds, minimizing administrative
procedures. However, with the large transaction size, it is difficult for small
investors to participate in the transaction. The only way for an individual investor to
invest in a bond is to invest in bond funds. Thus, investors with small capital can
solve the problem of investment portfolio diversification.
In order for the stock market in Vietnam to truly be a medium and long term capital
mobilization channel for the economy, a new path should be promoted as
securitization of mortgage-backed securities. . Securitization is a process that
creates more commodities for the financial market. Contribute to the diversification
of investment channels, thereby attracting idle capital in the economy. In addition,
the appearance of mortgage-backed securities creates liquidity for loans, through
48
the secondary market of loans. Thus become a factor to improve the efficiency of
financial intermediaries, thereby promoting the stock market development.
5.3.4.5.4.3. Improving Educating investorsininvestors in ’ knowledge of

Vietnam’s securities market
The stock market in Vietnam is in the development stage, predicting that the
demand for human resources for this sector will increase. As a potential economic
sector, the securities industry is seriously lacking in high quality human resources.
Improving the quality of human resources for the stock market is an urgent need. To
develop the market, the human resources policy must be reasonable to meet the new
requirements of the market.
The training of human resources quality for the stock market is very important. The
market that wants to develop is inevitably the capacity of people to meet the high
requirements to learn new knowledge. The government should have incentive
policies through securities companies and universities to organize knowledge
courses on investment in securities and provide necessary knowledge to investors
when participating in the market. the school. If you are an employee in the field of
securities, you must have specialized knowledge, the ability to communicate, the
ability to persuade and respond to customers to communicate fully, accurately and
can be distributed ability of financial analysis to the investors. Investors must
always improve their financial knowledge, improve their analytical skills and be
sensitive to market information. Besides learning the theory, investors need to have
real friction by participating in the practice session at the stock exchange. From
that, we flexibly apply the knowledge we have learned into our practice and draw
our own experiences. Another important point is that investors need to be aware of
the risks in their decisions. In addition, investors should pay attention to the process
of collecting and processing information and should obtain information from
reliable sources. At the same time, there should be a comparison between many
sources of information to verify their correctness and accuracy.
 When investors have been trained in securities investment, understand the
investment tools in the financial market, understand and apply the models of
analysis, valuation and investment portfolio construction methods. The
Markowitz model will come closer to investors, along with the knowledge
and experience that draws from the developed markets in the world, the
Vietnamese investors can build optimal portfolio and develop Vietnam stock
market.
5.3.5.5.4.4. Fulfilling ImprovinglegalImproving legal framework for stock

investment activities
It is clear that only when the legal framework for organization and operation is
complete can the stock market develop sustainably. 2017 can be considered as a
breakthrough year to perfect the legal framework of Vietnam stock market to
welcome integration, to be upgraded from "marginal" to "emerging" soon. Then
49
despite the uncertainty outside, the stock market in 2018 has many opportunities for
investors both inside and outside the country. However, the stock market also
identifies emerging market imperatives, where legal frameworks are still
incomplete. The phenomenon of fraud on the market as insider trading,
manipulation of stock prices, insider information, information causing market
turbulence, price, short sale, still appear and make the stock market ineffective.
Facing with information that does not reflect true, the market is not transparent is
extremely disadvantage for the rights and interests of investors. With the
characteristics of the market type of commodities especially the financial
investment instruments, the stock market has the participation of many subjects
with different interests, including the interests of investors, owners issuance, listing
securities business entities. It is not easy to ensure that the interests of all parties are
met, so that the law is strictly enforced on the rights and interests of the parties,
especially those on market transparency. Equity for investors and healthy
competition in business activities of securities companies, leveraging for the
development of the stock market. Therefore, the State must promulgate a
comprehensive legal system to regulate activities on the stock market, minimize
fraudulent activities in securities activities, ensure equity and interests for securities
companies. market participants. This is in line with the objective of securities
market management recommended by IOSCO (International Organization for
Securities and Securities Commission) as "private". In the current trend of
integration and globalization, laws in all fields have been amended and developed
to conform to international practice. Specifically, the stock market is represented by
the State Securities Commission (SSC) and other laws such as the Law on
Enterprises, Investment Law, Banking Law and Credit Institutions, Competition
Law, Foreign Investment Law, Commercial Law. ... creating a level playing field
for all types of enterprises, creating a solid legal foundation for the market
development. For the Law on Securities of Vietnam effective from 01/01/2007,
regulations on granting operating licenses for securities companies, decisions of the
State Securities Commission. However, a series of guiding documents have not yet
created a complete, consistent and stable legal environment to regulate all activities
on the stock market. Because the legal validity of the documents under the
Commission is not high, it is difficult to fully resolve the conflicts and conflicts
with other relevant legal documents. In addition, the problem of issuing and trading
securities is related to many aspects of life, economics and society that are regulated
by various law disciplines. Therefore, it is necessary to synchronously and unify
legal documents on stock market, securities activities and other related legal
documents in order to ensure the effective operation of the stock market in
particular and of the whole economy - society in general. This is a prerequisite for
any analysis, investment in a separate account or as a portfolio becomes easier and
easier.
In summary, Chapter 5 focuses on how to improve the applicability of the

Markowitz model and its usefulness in building a portfolio in the Vietnamese stock
market. Provide improved proposals for a clear and transparent information system.
Along with these are recommendations to improve the quality and variety of
50
financial instruments on the stock market. When referring to the quality of human
resources in the securities industry, it is necessary to meet the requirements of
general development, keep pace with the sensitivity of the market, full knowledge
of economics - finance - evidence. contract to. High quality human resources mean Formatted: Strikethrough, Highlight
that the development of the market, bring the theory of portfolio is closer to the
investor. Considering investors, they also need to improve their knowledge of
finance and securities so that they can identify their investment plans and turn
themselves into active ones without the pressure of the herd. More decisive measure
is finishinglegalfinishing legal framework for securities investment activities. The
writer provides personal insights and solutions to create a favorable environment for
Markowit's theory and utility theory of investment portfolio, making a broader
interests of investors in the Vietnamese securities market.
5.4 Conclusions Formatted: Font: Bold
51
52
Formatted: Font: (Default) Times New Roman, Bold,
CONCLUSION English (United States), Strikethrough
Trong phần này em cần nêu lên những kết luận được rút ra, chứ không phải giới Formatted: Strikethrough
thiệu lại về đề tài. Formatted: Font: Bold
The stock market always has a relationship between risk and return, and the fact
that every investor is aware of the higher the risk, the greater the return. Building
and developing the stock market is an indispensable trend of the economy. Since its
inception, the stock market has attracted a great deal of investors, and this is also an
important medium and long term mobilization channel contributing to economic
development.
The forms of investment in securities market are increasingly expanded and more
effective. Investors are gradually interested in and explored ways of investing in the
world, effectively understanding the importance of portfolio investment. Modern
portfolio theory has been studied, developed and applied widely in the world both in
theoretical and empirical sense. Research on portfolio selection and portfolio
diversification, Markowitz's theory builds the calculation formula, selecting the
mean and variance of the portfolio. The theory that Markowitz presents as a non-
systematic risk is reduced, even eliminated, when an investor gains an asset in his or
her portfolio. This is considered as premise theory to develop specific cases for each
market with each economy bearing different characteristics. Another common
concept is the degree to which the investor satisfies the expected return within the
specified risk range. The study with Chapter 1 outlines the basic definitions and
calculations used for the investment portfolio. The hypothetical calculations and the
investment portfolio development process are then applied to the Markowitz theory,
which determines the optimal investment portfolio when the investor precedes the
risk tolerance. Chapter 2 is a review of Markowitz theory, utility, and research.
Chapter 3 is the steps in the research methodology to build the optimal investment
portfolio. Chapter 4 is a practical example when building the Markowitz theory
portfolio of 10 steel stocks in Vietnam, the steps to address each of the requirements
from the market analysis, the determination of return and risk. , then predicts the
expected return and risk of each stock. The weight for the optimum portfolio will
determine the expected return. Chapter 5 shows the difficultyondifficulty on the
stock market in Vietnam. From the analysiszes, researches in Chapters 2, 3 and 4,
the sections of Chapter 5 are solutions, recommendations to enhance the application
of theory to the market in Vietnam. Issues to address when developing the
Markowitz theory portfolio from data processing, improving information quality,
diversifying investment instruments, providing professional training for quality
human resources. high. Finally, when the legal framework for the Vietnamese
securities market is improved, bringing the unity of relevant documents together,
creating a favorablefavourable environment for the development of new theories in
the market. The study has gone from the most fundamental issues of investment
portfolio theory, practical application to the steel industry of Vietnam, and then
realized the difficulty of applying the model. The writer expects that Vietnamese
53
investors will gradually go deeper into the Markowitz investment portfolio model,
not only stop at research but making use of and setting the basis for making
investment decisions.
54
55
REFERENCES
1. CFA Institute. (2017), Level 1 Volume 4 – Corporate Finance and Portfolio

Management NXB???sach nay emkhongtimduocnhaxuat ban a
2. CFA Institute. (2017),. Level 1 Volume 5 – Equity and Fixed Income NXB???
3. Bodie-Kane-Marcus (2013), Ninth Edition, “Essentials of Investments”, McGraw
Hill Education. NXB???
56
APPENDIXES
4.6. Optimal portfolio construction for individual investor
Basic questionaires to help investors define level of risk aversion:

Question 1: Are you an investor who is willing to take high risk to achieve high
profit? Does the relation between risk and return influence your investment
decision?
o No =>Risk neutral investor, not influence by the relation
of risk and return
o Yes =>Risk seeker or risk averse investor, influenced by
the relation of risk and return
Question 2: Which level does the relation of risk and return influence your
investment decision?
o Very much =>Investors really concentrate on the relation of risk
and return, it has huge impact on investment decision
process
o Normal =>Investors not highly concentrate on the relation of
risk and return; the relation of risk and return is not the
first matter that investors consider
Question 3: Do you intend to invest in high risk securities?

o Not intend =>Investors don’t want to invest in stocks with high
volatile because high volatile means high risk
o Surely when =>Investors are interested in stocks with high volatile
knowing the stock because it means high return. This is possibility a stock
is highly volatile with potential return
o Hestitant Hesitant =>Investors hestitate to invest to high volatile stock Formatted: Strikethrough, Highlight
when knowing the although know that return can compensate for the risk Formatted: Highlight
stock is highly
volatile
57
Question 4: Do you stop when observing that return of a risky investment increase
beyond your expectation?
o Immeidiately stop =>High return means high risk, so investors will not
investing accept that risk
o Still continue to =>Investors accept to increase investment risk but start
invest but to feel that this is uinsecured investment and need to
consider stopping consider decision
o Continue to invest =>Investor love risk and willing to accept high risk for
and have no high return
intend to stop
Question 5: What types of relation between risk and return would be suitable for
your financial ability and expected return?
o Low risk – low =>Investors have low income but not likely to take loss
return as well
o Average risk – =>Investors have average income with low volatile.
average return Still afraid of investment with high risk
o High risk – high =>Investors love risk, have high income but high
return volatile, they are willing to accept high risk to achieve
high return
58
Using solver tool to calculate stock weights
 Solver with A = 4
59
 Solver with A = 1
60

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NATIONAL ECONOMICS UNIVERSITY

CENTRE FOR ADVANCED EDUCATIONAL PROGRAMS

BACHELOR’S GRADUATION THETHISTHESIS

APPLYING MARKOWITZ THEORY AND

By Nguyen Phan Quang

GRADUATION THESISBACHELOR’S THETHIS

Student: Nguyen Phan Quang

CHAPTER 2. LITERATURE REVIEW RISK, RETURN, UTILITY AND MARKOWITZ

CHAPTER 3. RESEARCH METHODOLOGY ....................................................................... 2625

CHAPTER 4. RESEARCH RESULTS ....................................................................................... 2928

CHAPTER 5. CONCLUSIONS AND RECOMMENDATIONS .......................................... 4443

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Hanoi, April 23, /4/2018

Nguyen Phan Quang

JSC Joint Stock Company

Graph 2.1 Risk and return for different correlation

1.2. Research objective

1.4. Research methodology

1.5. Structure of Study

2.1. Basic portfolio theory overview

2.1.1. Risk and return concept

2.1.2. Investment portfolio definition

2.1.3. Risk, return and risk- - return relationship in investment portfolio

2.1.3.1. Expected return and risk of an security

2.1.3.2. Measurement the relation between 2 securities

Covariance breaking down:

=> Interpreting the meaning of coefficient correlation

2.1.3.3. Risk and return of investment portfolio

 Risk of investment portfolio

Graph 2.1: Risk and return for difference correlation

2.1.3.4. Investment efficient for portfolios

Source: CFA level 1 – Volume 4

2.2.2. Utility Value

2.2.3. Indifference cure

Graph 2.3: Classify the zone organization of portfolio

Source: CFA level 1 – Volume 4

Graph 2.4: The indifference curve

2.3. Markowitz Portfolio theory

2.3.1. Markowitz theory’s assumption

2.3.2. Steps of building portfolio regarding Markowitz theory

2.3.3. Optimal investment portfolio and Efficient frontier

 Find 𝑅𝑝 maximum with the following condition

Graph 2.5: Efficient frontier

Graph 2.6: Interpreting the Efficient Frontier

2.3.4. Construct optimal investment portfolio

3.1. Data collection and processing

 Multi-factor model Fama-French

3.2. Optimal portfolio construction process for Vietnam’s steel industry

CHAPTER 4. RESEARCH RESULTS