1) The document discusses capital markets and investment analysis in Indonesia. It analyzes 5 stocks using Markowitz efficient frontier analysis to create an optimal portfolio. 2) It finds adding a risk-free asset shifts the efficient frontier upward, changing the stock allocations. Regression analysis finds the portfolio has a positive alpha and beta, indicating abnormal returns and that returns increase with the market. 3) Behavioral factors like overconfidence and loss aversion likely impact the market, suggesting it is not fully efficient. The positive alpha also implies abnormal returns are possible.

1. Capital Market Analysis
MID EXAM CAPITAL MARKET ANALYSIS
Make an essay which addresses the following questions in a pdf-formatted document with maximum
of 5 pages (not including tables/appendixes/reference list), font: Times New Roman, size: 11, and space:
1.5.
1. Explain your views about capital market, financial literacy, and investment inclusion in
Indonesian market.
2. Select minimum 5 stocks in IDX80 index, then create Markowitz Efficient Frontier based on
the stocks you have chosen. Make decision on the proportion of each stock you would invest
to make up your optimal portfolio. Justify your decision.
3. In the presence of risk-free asset (use 10Y Indonesian Gov’t Bond as a proxy), how the
inclusion of this risk-free asset would influence your stock allocation decision above? Explain.
4. Calculate the alphas and betas of stocks you chose above using regressions, then make decision
on whether you should invest in those stocks.
5. a) Based on the alpha calculations, examine whether the market is efficient or not.
b) What behavioral finance that you find or expect to find affecting the market
expectation on the stock returns.
The Answer or the Essay:
Capital Market - The Capital Market, also known as exchange bays, is a meeting place for unit deficits
and surpluses, where the stock exchange acts as a facilitator, allowing cash from investors to be stored
and used as capital by various issuers in a stock index.
Financial Literacy & Investment Inclusion - For investors, financial knowledge is critical. Because
excellent financial literacy can aid investors in avoiding being duped by the capital market.
The Financial Services Authority (OJK) conducted the third National Financial Literacy and Inclusion
Survey (SNLIK) in 2019, which revealed that the financial literacy index was 38.03 % and the financial
inclusion index was 76.19 percent. This number is higher than the results of the 2016 OJK poll, which
showed a financial literacy score of 29.7% and a financial inclusion index of 67.8%. Thus, in the last
three years, public financial literacy has increased by 8.33 percent, while access to financial products
and services (financial inclusion) has increased by 8.39 percent. The 2019 OJK SNLIK poll includes
12,773 respondents from 34 provinces and 67 cities/districts, with gender and urban/rural strata
considered.

2. 2
Figure 1. Financial Literacy & Investment Inclusion Index
Due to the simplicity of being able to register with a broker and begin transacting to acquire shares in
the present economic period, there has been a considerable growth in financial literacy and financial
inclusion in Indonesia. Also, because a lot of information on the stock market can be found on the
internet, the literacy gained is significant.
Markowitz Efficient Frontier
Of all the stocks in the IDX80 index, I chose 5 stock issuers namely MDKA, SIDO, BBCA, SRTG
and ANTM. The five stocks I chose because each has a positive mean monthly return and covariance
whose dominance is smaller than other stocks in the IDX80 index to produce optimal Expected Return
(Mean) based on risk (Standard Deviation). By using Markowitz Efficient Frontier Analysis, it can be
determined all portfolios that lie on the minimum-variance frontier from the global minimum-variance
portfolio and upward provide the best risk-return combinations. The period used is 60 monthly return
from March 1, 2017 to March 1, 2022. Then with solvers formulated to minimize standard deviation,
the Standard Deviation (Risk) portfolio is obtained at 3.66% and the Mean (Expected Return) portfolio
is 2.41% which becomes the best risk-return combinations. With the proportion of shares consisting of
the above 5 issuers, namely MDKA (5%), SIDO (29%), BBCA (50%), SRTG (16%) and ANTM (0%)
which total 100%. Here's a graph showing the Markowitz Efficient Frontier Analysis:

3. 3
Figure 2. Efficient Frontier.
Risk Free Rate - Then, by adding Risk Free Assets which is 10Y Indonesian Government Bond as a
proxy with a Risk-free rate of 6.9% which is divided by 12 to 0.575% per month because the data
processed is the monthly period of each issuer. So, by adding risk free asset, the proportion of expected
return portfolios has increased or shifted to 2.84% with standard deviation (risk) of 4.07% or which
becomes point M. Furthermore, the proportion of stocks formed also changed as it should be MDKA
(16%), SIDO (35%), BBCA (30%), SRTG (19%) and ANTM (0%) which totaled 100%. The
combination of risk-free assets with risky assets forms a CML (Capital Market Line) line with a slope
of 55.55% which is used to improve optimization of the risky portfolio when the CML line intersects
with the Market Efficient Frontier curve. Here is a chart showing the Market Efficient Frontier with the
Capital Market Line (CML) curve:
1,67%
2,00%
2,25%
2,41%
2,50%
2,75%
2,84%
3,00%
3,25%
3,50%
3,75%
4,00%
4,25%
4,50%
4,58%
2,41%
0,00%
1,00%
2,00%
3,00%
4,00%
5,00%
0,00% 2,00% 4,00% 6,00% 8,00% 10,00% 12,00% 14,00%
Expected
Return
Standard Deviation
Efficient Frontier
Efficient Frontier Global Minimum Variance Portofolio

4. 4
Figure 3. Efficient Frontier and CML.
Regression – Regression can help to calculate the alpha and beta values of the 5 stock issuers I selected.
In the calculation of regression value Y inputted is the expected return portfolio after being combined
with Risk Free Asset and value X input is the Indonesian Stock Index, namely IHSG. Based on
regression calculations in Microsoft Excel, alpha values are 0.0262 and Beta is 0.4950.
Table 1. Summary Output from Regression
1,67%
2,00%
2,25%
2,41%
2,50%
2,75%
2,84%
3,00%
3,25%
3,50%
3,75%
4,00%
4,25%
4,50%
4,58%
0,58%
7,35%
4,58%
2,77%
1,67%
3,39%
3,74%
2,84%
0,00%
1,00%
2,00%
3,00%
4,00%
5,00%
6,00%
7,00%
8,00%
0,00% 2,00% 4,00% 6,00% 8,00% 10,00% 12,00% 14,00% 16,00% 18,00% 20,00%
Expected
Return
Standard Deviation
Efficient Frontier and CML
Efficient Frontier CML Line MDKA SIDO
BBCA SRTG ANTM M

5. 5
Figure 4. Return IHSG Line Fit Plot
Alpha of 0.0262 explains that when IHSG is at 0% then the portfolio returns increases by 2.62% and
this is significant or hypothetically confirmable because the value of P value is below 5% which is
(4.50573E-07) and alpha can produce abnormal return. While the Beta of 0.4950 explains the slope of
the curve or it can be concluded that the increase of IHSG in length will increase the portfolio return by
0.4950 times. The result is significant or hypothetically also confirmed because the value of P value is
below 5% which is (4.3785E-05). So based on the alpha and beta obtained, then I decided to invest
because alpha = + 0.0262 which is outperforming the market, and beta of 0.4950 which is positive as
well so that the increase in IHSG will increase the return of the portfolio.
The concept of efficient markets was first proposed and popularized by Fama (1970). In this context
what is meant by the market is the capital market (capital market) and the money market. A market is
said to be efficient if no one, both individual investors and institutional investors, will be able to obtain
abnormal returns, after adjusting for risk, using existing trading strategies. That is, the prices formed in
the market reflect existing information or "stock prices reflect all available information". Another
expression states that in an efficient market the prices of an asset or security quickly and intact reflect
the information available about the asset or security. The efficient market hypothesis (EMH),
alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all
information and consistent alpha generation is impossible. Based on the calculation of alpha above, the
alpha obtained is positive that is outperforming the market or there is an abnormal return on the
-10,00%
-5,00%
0,00%
5,00%
10,00%
15,00%
-20,00%-15,00%-10,00% -5,00% 0,00% 5,00% 10,00% 15,00%
Return
Portfolio
Return IHSG
Return IHSG Line Fit Plot
Return Portfolio
Predicted Return Portfolio

6. 6
portfolio. Because the portfolio consisting of 5 stock issuers above produces abnormal returns, it can
be concluded that the market is not efficient.
Behavioral finance - According to the research from Ahmad Yousef (2019), The researchers concluded
that there was a significant impact of overconfidence, loss aversion, herding risk perception, behavioral
finance factors on stock investment decision making at ASE. (Overconfidence) was the most relatively
important factor, followed by (Loss aversion), then (Risk Perception), while (Herding) was last.
Table 2. Behavioral Finance
No Behavioral Finance Definition and Explanation
1. Overconfidence
Investors tend to have too much confidence in the accuracy of their own
judgments. The concept of overconfidence was tackled by many
cognitive behavioral experiments and surveys in which subjects
overestimate their own predictive abilities and the precision of the
information they’ve been given.
2. Loss aversion
Loss aversion refers to the difference level of mental consequence that
people may have from a similar size loss or gain.
3. Risk Perception
Risk perception is the subjective decision-making process that
individuals employ concerning the assessment of risk and the degree of
uncertainty.
4. Herding
Herding occurs when individuals’ private information is overwhelmed
by the influence of public information about the decisions of a herd or
group.
Reference
Ahmad, Yousef. 2019. Impact of Behavioral Finance on Stock Investment Decisions Applied Study on
a Sample of Investors at Amman Stock Exchange.
Bodie, Kane, Marcus. 2017. Essential of Investment. McGraw Hill Education.
Gumanty, Ary. 2002. Bentuk Pasar Efisien dan Pengujiannya.
Www. Ojk. com