Portfolio Analysis Using Single Index Model ANTON ABDULBASAH KAMIL School of Mathematical Sciences Universiti Sains Malaysia 11800 USM, Minden, Penang MALAYSIA Abstract: - This paper focused on portfolio analysis that set-up among 10 selected stocks from Kuala Lumpur Stock Exchange (KLSE). Two types of analysis conducted in this paper, which is daily analysis and weekly analysis using single index model. The result shows that entrance of 5 stocks to set-up optimal portfolio for daily analysis and only 2 stocks been selected in the weekly analysis. Among this 2 analysis, weekly analysis provides a higher profit level with lower risk level if compared to daily analysis. Key-Words: - Investment return, Investment risk, Diversification, Portfolio theory, Expected return and risk. 1 Introduction This paper will focus on stock investment through setting up a portfolio with calculated expected profit and risk level. The main objective is to select an optimal portfolio from daily and weekly analysis that will provide an optimal return with certain level of risk among 10 selected stocks in KLSE. Single index model provide an optimal expected return and risk through formula (1) and (2). Expected return, m p p p R R β α + = (1) Expected risk, ∑ = + = N i e i m p p i X 1 2 2 2 2 2 σ σ β σ (2) where: ∑ = = N i i i p X 1 β β ∑ = = N i i i p X 1 α α Throughout this paper, a best combination of stocks in portfolio will be conducted with high profit and low risk level. Besides, the proportion of capital to invest in selected stock will be computed with single index model. 2 Theory 2.1 Investment Return The return of an investment is the money earned from the difference of the investment result as a profit of the investment. The expected return of an individual stock can be written as, m i i i R R β α + = (3) where: = i R The expected return to security i = i α The component of security i’s return that is independent of the market’s performance – a random variable. = i β A constant that measure the expected change in i R given a change in m R . = m R The rate of return on the market index – a random variable. 2.2 Investment Risk According to Fisher and Jordan (1994) the investment risk is a risk of holding securities which is generally associated with the possibility that the return will be less than the return that were expected. Risk is also define as a standard deviation around the expected return. More