Author: Woo, Wai-tong
Title: The applicability of the modern portfolio theory in the Hong Kong Stock Market : a test on the stability of the correlation coefficients and the effect of different subperiods of calculation
Degree: M.Sc.
Year: 1995
Subject: Stock exchanges -- China -- Hong Kong
Portfolio management -- China -- Hong Kong -- Case studies
Hong Kong Polytechnic University -- Dissertations
Department: Multi-disciplinary Studies
Pages: vii, 78 leaves : ill. ; 30 cm
Language: English
Abstract: The Modern Portfolio Theory (MPT), proposed in 1952 by Harry Markowitz, was deemed to be a revolutionary approach to portfolio combination in the investment community. Since then, an investors were not just focusing on the return earned from a portfolio, but also the associated risk he would face in holding it. Lot of subsequent researches and theories, building on the concept of the MPT, sought to explain the rationality of the security markets and ultimately the movements of individual investment vehicle. However, although some original assumptions in MPT have been modified by researchers in the past few decades, others are still left to constitute the main foundation of the portfolio theories. One major assumption is that the efficient frontier of the available portfolios in the investment market would stay stable throughout time. The necessary condition for this to hold is that the correlation coefficients between portfolio movements would not fluctuate. On the other hand, the choice of sub-periods for calculation of the correlation coefficients for same span of time horizon by different investors should not affect the value of the correlation coefficients and thus the shape of the efficient frontier. This study, focusing on the Hong Kong Stock Market, is trying to examine the validity of the above two arguments on the Sectoral Sub-indices of the Hang Seng Index. A span of nine years, from January 1985 to December 1993, is studied. Various statistical methods are employed to test the stability of the correlation coefficients for different pairs of the Sectoral Sub-indices and also the effect of different sub-periods of calculation on the value of the correlation coefficients. Subsequent findings show that in a significance level of 5%, the hypothesis that the correlation coefficients are generated by a random process and the hypothesis that different sub-periods of calculation have no impact on the value of the correlation coefficients cannot be rejected. The result of the study, based on the above findings, concludes that although the correlation coefficients for pairs of the Sectoral Sub-indices are not affected by the choice of sub-period of calculation, are however unstable for the period from January 1985 to December 1993. The efficient frontier for the Hong Kong Stock Market was fluctuating from time to time and thus rendered the investors in an extremely difficult position to choose an optimal portfolio according to their own utility function. The Modern Portfolio Theory, whose main assumption that the efficient frontier is stable overtime, was in serious defect when applied to the Hong Kong Stock Market.

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