Title: ANALYSIS OF EFFICIENT MARKET THEORY AND RANDOM WALK THEORY IN THE INDONESIAN CAPITAL MARKET
Authors: BERNAD MAHARDIKA SANDJOJO
Item Type : Thesis (Thesis)
Affiliations: Master of Management Science Study Program, Faculty of Economics and Business, Universitas Airlangga , Surabaya, Indonesia
Publisher: Universitas Airlangga
Abstract
The Indonesian capital market still holds tremendous potential, given its significant year-on-year growth, both in terms of size and price. The Jakarta Composite Index (JCI) rose 15.32% from the end of 2015 (the JCI closed at 4,593.01) to the end of 2016. Indonesia's capital market capitalization in 2016 significantly increased from USD 353.25 billion (approximately IDR 4,872 trillion) at the end of 2015 to USD 428.22 billion (approximately IDR 5,753 trillion) at the end of 2016, representing approximately 48.5% of Indonesia's GDP, the second-highest growth rate in Asia after Thailand. The numerous theories circulating in the market regarding selecting issuers for portfolio formation pose a challenge for novice investors before entering the capital market. Therefore, this study aims to determine whether fundamental analysis can provide above-market returns compared to randomly selecting a portfolio. This study uses three main criteria from the fundamental ratios commonly used by Warren Buffett in stock selection: ROE, DER, and NPM, to compare their return-to-risk ratios with randomly formed portfolios and market performance. Warren Buffett's fundamental criteria are used as a reference, given that no investor has achieved consistent performance like Warren Buffett's over decades. The results show that both fundamentally and randomly formed portfolios outperformed the market, but not significantly. This suggests that the Indonesian capital market is sufficiently efficient that it is still impossible to profit from the market. On the other hand, the return-to-risk ratios between randomly formed portfolios tended to be similar, or even slightly outperformed most portfolios formed based on fundamental criteria. This suggests that stocks in Indonesia tend to move not based on past performance but rather on future information. Issuers tend to move randomly, so fundamentally and randomly formed portfolios do not provide significantly different returns.
Keywords: Indonesian capital market, portfolio formation, fundamental analysis, Warren Buffet, Return on Equity, Debt to Equity Ratio, Net Profit Margin, Random portfolio.
Sources: http://repository.unair.ac.id/64902/