Feasible portfolios under tracking error, β, α and utility constraints

The Kingdom of Saudi Arabia is strongly committed to stimulating savings culture in the local community by providing financial literacy in financial planning, investments, and budgeting. Inculcating the savings and investment behavior among the people will help materialize one of the elements of Saudi Vision 2030. Tadawul, being the most liquid stock market in the Middle East and North Africa, offers investors the ability to grow their capital with confidence through facilitating trading in different securities such as equities, debt instruments, and Exchange Traded Funds (ETFs). There is a great scope for investors to invest in the companies listed in Tadawul All Share Index (TASI) due to its strong economic fundamentals. The present study aims to apply the CAPM in Tadawul listed stocks, which will help in understanding the systematic and unsystematic risk associated with stocks, understanding their actual and theoretical return on stocks. The methodology adopted is the analysis of secondary data for all listed stocks in Tadawul using the Bloomberg terminal. The financial valuation includes elements like beta, alpha, correlation and standard deviation, expected return and actual return. The practical value obtained from the study will help investors go for undervalued stocks with lower beta, higher expected annual return, and lower systematic risks. Thus, the result shows the predicting power in KSA market and the scope for long-term investments by the investors to boost their savings and investment behavior and materialize one element of Vision 2030.

Acknowledgment
This research was funded by the Deanship of Scientific Research at Princess Nourah bint Abdulrahman University through the Fast-Track Research Funding Program.

This research is aimed at analyzing the causality puzzle on the correlation between financial leverage and systematic risk (beta). Financial leverage and beta are usually considered as two proxies of risk derived from different domains: one ends at financial decision outcome, and the other points to market. Cross-sectionally, this result does not support the moderating-variable impact of size on the relation between financial leverage and systematic risk. On the other hand, however, the moderating-variable impact of industry and operating leverage (to some extent) on the relation between financial leverage and systematic risk were well documented. Inter-temporally, financial leverage is significantly and symmetrically related to beta, not moderated by size and operating leverage. This means that the two variables show bidirectional causality. This study contributes to the new insight that financial leverage and beta are the two variables with bidirectional causality, showing that in the long run, risks from fundamental (financial/micro-economy) and from market (macro-economy) are tightly linked to each other inter-temporally.

Recent (2018) evidence identifies the increased need for active managers to facilitate the exploitation of investment opportunities found in inefficient markets. Typically, active portfolios are subject to tracking error (TE) constraints. The risk-return relationship of such constrained portfolios is described by an ellipse in mean-variance space, known as the constant TE frontier. Although previous work assessed the performance of active portfolio strategies on the efficient frontier, this article uses several performance indicators to evaluate the outperformance of six active portfolio strategies over the benchmark – subject to various TE constraints – on the constant TE frontier.