Multivariate Analysis of Portfolio

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KSE 100
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  As our portfolio is based on a a couple of sectors, so I assume that following variables considered in this regression can have an impact on the expected returns of our portfolio. Although the variables assumed are common macroeconomic variables, but this regression proves the impacts oin our portfolio. Multivariate Regression: The results of this multivariate regression is based on the regression of KSE100 index, foreign direct investment, exchange rate, oil prices and inflation rate against the expected returns of the portfolio based on nearly, 16 stocks, comprising the automobile sector, pharmaceutical sector , FMCG sector, fertilizer sector, cement sector, steel sector and chemical sector. Although it is believed that the domestic economics played an important role in the execution of stock market. But the foreign investors have seen a tremendous trust in the Pakistani economy in the recent years. The FDI is a long term commitment in the economic activities of the host country. There has been a number of studies on the relationship of FDI and stock market. The stock market has a positive influence on the growth of FDI (Olasukanmi, 2009). Even our results reflects the same side of the story. The t-statistics of the FDI variable supports our results too. The share of the FDI is invested in the Pakistan Stock, as it has been witnessed in a couple of years. So, overall this will increase the value of the portfolio and the expected returns too. The effects of exchange rate can influence FDI and the distribution of investments across the country. The depreciation of the exchange rate can have both the positive and negative impacts. In the starting, the contraction of wages and production costs of the country with the foreign counterparties. It also reduces the return of the foreign investors. The coefficient and t-statistics of the exchange rate is negative as according to our expectations. The depreciation of the currency like our case the Pakistan rupees against the US dollars will affect the inflow of the FDI. As per the theory, the investors are mostly interested in the high returns oin the investment. The negative sign of the coefficient exchange rate indicates that depreciation in the Pakistan rupee negatively influences the inflow to the Pakistan. In a nutshell, there is a great role of the monetary policy in the FDI inflows, so it’s preferable for the stable currency. The role of oil prices have played a great in the expenses of the oil-importing countries especially Pakistan. Our regression predicts there is a positive relationship between the oil prices and the expected returns of the portfolio. Different studies have shown this result. Asghar and Ansar (2003) summarized the effects of oil prices on the inflation (CPI) and stock exchange (KSE100). This study also revealed that there is positive relationship between the oil prices and expected returns. This is the following equation after regression. _cons 1.682147 .5465204 3.08 0.012 .4644235 2.89987InflationRate -.0565418 .0280803 -2.01 0.072 -.1191087 .006025 OilPrices .0094041 .0035592 2.64 0.025 .0014737 .0173346 Exchangerate -.0251045 .0108237 -2.32 0.043 -.0492211 -.0009879 FDI 1.21e-10 5.09e-11 2.37 0.039 7.24e-12 2.34e-10 KSE100 .0000401 .0000192 2.09 0.063 -2.68e-06 .0000829 PortfolioRe~s Coef. Std. Err. t P>|t| [95% Conf. Interval] Total 2.34302372 15 .156201582 Root MSE = .2791 Adj R-squared = 0.5013 Residual .778941948 10 .077894195 R-squared = 0.6675 Model 1.56408178 5 .312816355 Prob > F = 0.0293 F( 5, 10) = 4.02 Source SS df MS Number of obs = 16  () = 3.08+   (100)+   ()−  (ℎ )−  ( )+  ( )  The increase in the oil prices results in the increase in the value of the oil exploration companies, but at the same time, this increase will increase the input costs and other administrative costs of the portfolio stocks. This increase in the prices results in the transfer of the increased prices to the consumers, which will have the two effects. Although the revenues of the companies increases but in the long term, the only inelastic goods somehow shows the positive trend, while the other stocks will show decrease in the demand of the volume of goods. Overall, this inflation will decrease the portfolio of our returns, as our stocks are not only oil exploration based. Keeping all these factors in mind, the expected return of our portfolio is meant to be increased because of the expected increased FDI, stable oil prices (predicted till 2020), within ranged inflation rate (6-7%). The exchange rate devaluation is a two way sword, have positive and negative effects, but keeping the proportion of our portfolio, we are less affected to be with the fluctuations of the rupee against the dollar to a normalized level. In the last 1 ½, we have lost nearly 4% of our portfolio, till now, we have nearly recovered almost all our portfolio, so overall, we are up to the market index. The VIF below shows that our variables are not having multi-collinearity issues. In addition, the heteroskedastcity supports our result. Citations Mean VIF 6.14 OilPrices 2.01 0.497232 FDI 2.20 0.455120InflationR~e 2.53 0.394641Exchangerate 10.03 0.099704 KSE100 13.91 0.071905 Variable VIF 1/VIF Prob > chi2 = 0.7467 chi2(1) = 0.10 Variables: fitted values of PortfolioReturns Ho: Constant varianceBreusch-Pagan / Cook-Weisberg test for heteroskedasticity Prob > F = 0.3874 F(3, 7) = 1.17 Ho: model has no omitted variablesRamsey RESET test using powers of the fitted values of PortfolioReturns  Ansar, I. and Asghar, N. (2013). The Impact of Oil Prices on Stock Exchange and CPI in Pakistan. Journal of Business and Management, 7(6), 32-36.
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