Inzinerine Ekonomika-Engineering Economics,
Inzinerine Ekonomika-Engineering Economics, 2012, 23(2), 144-153Development, Implementation and Evaluation of Multistage Investment StrategiesEimutis Valakevicius, Kristina VaznelyteKaunas University of TechnologyStudentu st. 50-219, LT-3031, Kaunas, Lithuaniae-mail: eimutis. valakevicius@ktu. It, kristina. vaznelyte(^stud. ktu. Itcross«-«* http://dx.doi.Org/10.5755/j01.ee.23.2.1542Construction of optimal investment portfolio is very complicated task due to many diverse factors which might affect riskand return of the portfolio in the future. Values and impact level of unique factors on the portfolio are changing over time;therefore every investor should take into account the fact that there always will be a certain level of risk associated withany portfolio involving stocks.There is a number of ways to form a collection of most appropriate stocks and bonds for investment portfolio as well as toallocate weights of assets based on various criteria. All of these methods, dedicated f'or selection and allocation of assets,have their specific features and some disadvantages. In order to be able to conclude which of the asset selection methodshave least disadvantages, four popular techniques were analysed and compared. These techniques were based on differentvariables: correlation coefficients between asset returns, maximisation of the utility function (diverse values of riskaversion coefficients were analysed), selection of assets with highest historical returns, and employment of modified priceto-earnings ratio.The article deals with multistage extension to the mean-variance and expected utility maximisation portfolio choice.Multistage investing consists of several essential stages, where each stage forms a basis for the next stage by providinguseful input data, derived by stage-specific analysis. For construction of optimal portfolio the following stages are used:asset allocation, security selection, investment strategy development, construction of the model and its evaluation.After asset allocation was made and stocks for the portfolios had been selected, different theoretical asset allocationmodels (equal weight asset allocation, Markowitz model Capital Asset Pricing Model (CAPM), model where risk freeasset is incorporated when constructing a portfolio) have been modified and adapted in order to become suitable for realmarket situation. Such prerequisites as normal distribution of stock returns were not satisfied by most Lithuaniancompanies ' stocks when different interims were investigated, therefore authors set a presupposition that distributionproperties of the stocks can be disregarded when Markowitz and CAPM models were applied to real market. Some otherchanges for the prerequisites of models were made; otherwise these theoretical models could not have been applied toLithuanian market.After all models had been applied in Lithuanian equity market, back testing was carried out and certain characteristics ofoutcomes of different investment strategies were compared. Results were judged against characteristics of popular stockexchange indices of Baltic States in order to obtain conclusions.Most models were developed for broad financiáis markets (global markets). In the paper we analyse financial market ofLithuania. Since this market does not fit assumed conditions of general models, the models were slightly modified toapply for Lithuania market. The results of portfolio were compared with Baltic States index.It was concluded that the highest retum rate is achieved by constructing the investment portfolio with employing modifiedCapital Asset Pricing Model. The best technique for selecting stocks proved to be the maximisation of utility function whenrisk aversion coefficient A=3. In addition to this, after comparison of different asset selection methods, it was noted thatthe highest value of the Sharpe ratio was achieved by utilising the same technique. After investigation it was noted thatinvestors should add a risk free asset into portfolio of stocks because it usually improves the results of most portfolios,irrespective of their contents. Constructing portfolios based on asset allocation according to indices analysed in the paperis not recommended because characteristics of indices were worse than the ones of constructed portfolios.Stocks of every company quoted in NASDAQ OMX Baltic (2011) Stock Exchange in Vilnius Official list for more than 10years (2001 beginning-2010 end) were investigated. Stocks of 14 companies satisfied preset 10 year interim criterion.Keyword.«.- stocks, asset selection, Markowitz model, asset allocation, asset pricing, Sharpe ratio, utility function, rate ofreturn.